Three simple questions can help cost-conscious asset allocators sort through the active vs. passive debate and ensure that management fees are being spent wisely.

Question 1: Are my active bets highly correlated? At times, products with similar tilts can be collapsed for more efficient implementation and potential cost savings.

Question 2: Do my separate, less-correlated investment products combine to form a benchmark-like portfolio? Holding too many products, or holding a product in every single corner of the global market, can lead to uninspiring performance at the broad portfolio level.

Question 3: Am I investing with any “closet indexers” that charge active fees? Beating a benchmark is difficult when your holdings are essentially identical to the benchmark.

Active investing has cycles of outperformance and underperformance, and active managers need dispersion to have their insights manifest into alpha. During market environments where everything moves up or everything moves down, it may be difficult to demonstrate the benefit of being active.

For those looking to reduce portfolio management costs, avoid building out a portfolio with lower-quality, “semi-active” products, and consider a combination of lower-fee, passive products blended with some high-conviction “very active” products. This can result in a more inexpensive implementation that retains the ability to outperform in environments when high-conviction, active bets are rewarded.
CFA® and Chartered Financial Analyst® are registered trademarks owned by the CFA Institute.

This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed above may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted.

All investing involves risk, including the risk of loss. Investment risk exists with equity, fixed income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.

Unlike passive investments, there are no indexes that an active investment attempts to track or replicate. Thus, the ability of an active investment to achieve its objectives will depend on the effectiveness of the investment manager.​

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