Active v Passive Investment Debate

Active v Passive Investment Debate

Russell Investments sheds light on active v passive investment debate Research findings provide NZ investors good framework for decision making

AUCKLAND, FEBRUARY 10, 2010 – New research by Russell Investments has produced a framework for helping investors decide when it is appropriate to choose an active or a passive investment approach.

The framework has been successfully run over the New Zealand investment scene.

Don Ezra, Russell’s co-chairman of global consulting and chairman of the Russell Global Knowledge Management Group, wants to broaden the “active versus passive” debate. He says Russell Investments considers that the debate has been too narrowly focused on comparing passive investment with the average returns achieved by active equity managers.

Mr Ezra partnered with Geoff Warren, senior lecturer at the Australian National University, and developed a framework containing five points that investors should consider.

Three of these points reflect situations where the passive index is either unavailable for some asset classes, poorly constructed, or unsuitable to meet investor’s own objectives.

The other two relate to expectations that active management can outperform passive benchmarks.

“Ultimately the question of whether to choose some alternative to passive investing should not be approached as a single, all-encompassing decision,” Mr Ezra says.”The choice is likely to vary across asset classes, investors and even time."

Dr Craig Ansley, Russell Investments’ Director of Capital Markets Research who is based in New Zealand, has applied Ezra and Warren’s framework to see how it applies to products and major assets classes used by New Zealand investors.

“It is notable that reasons such as the absence of an acceptable index can often rule out passive management in many asset classes, including most alternative assets, fixed income and probably commodities,” Dr Ansley says.

“In other assets, an active approach seems preferable because of reasonable prospects for active returns, as evidence either by historical experience and/or certain market features. NZ equities, emerging markets and global listed property fit into this category. Global equities is the only asset class where the case for active management seems to rest almost entirely on manager selection skill.”

Dr Ansley says the new research offers an excellent framework for the investment community to consider.

“Active versus passive is a constant topic of debate and investors need to understand how their unique objectives and circumstances figure into determining the optimal investment approach," Dr Ansley says.

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