Perspectives on Active and Passive

by Alexander Beard, on Oct 24, 2017 7:16:22 AM


One of the things I love most about working with investments is that it is impossible to isolate a single idea, cause or theme. All of the information is interlinked somehow, whether it is hard data or a philosophy of investment. As a result, the investment world can occasionally take you in surprising directions. This is what happened when I quickly skimmed over some headlines in the Financial Times towards the end of last month.

The headline that caught my attention somehow gave me the impression that George Orwell had written about active and passive investment management. Of course I had misunderstood the main subject, because the article was referring to a style of writing, specifically the voice chosen by the writer: “Never use the passive where you can use the active.” – was Orwell’s view. Very briefly, the active voice clearly identifies who is doing what and states it directly, perhaps more honestly.

An example of the active voice would be “Mr Bolton selected and purchased Apple shares for his portfolio”. The passive voice would be more along the lines of “Apple shares are in Mr Bolton’s portfolio.”

It struck me that there is something teenage about the passive voice. It takes a while to learn that virtually everything in our daily lives has been actively designed, created and is maintained by people. As you grow up, you increasingly become active in your outlook. In our home, this is demonstrated by a shift in the kids thinking from “the plates get cleared away after meals” (passive) to “let me help you with that” (well, we live in hope!).

So, it is a lovely idea that one can invest passively and the wealth with just happen. But in many respects, it is true! Stock markets reflect growing wealth, which seems the most likely outcome of capitalism – the sum of all commercial activity, if you like.

Indeed the last decade has seen stock markets rise strongly and rather consistently, with lower than usual levels of volatility. The key drivers of markets have been the central banks as they negotiate their way out of a financial crisis, such that it almost does not matter which shares you buy, the change in value will ‘just happen’

More recently there are indications that this balance might be shifting. As the business world edges back towards normality the high correlations between individual stock and the market as a whole could be falling away. Another article in the FT cited research by the Bank of America which showed that from 2013-16 93% of fund managers benchmarked against the S&P 500 failed to beat the market, but in the first half of 2017 54% of them were ahead of the market.

So are the times-a-changing? Or have central banks made the world a better place? All I know for sure is that George Orwell was not referring to styles of investment management.

Andrew Moore
Investment Director and Partner

Sources:
Financial Times – “Orwell was not always right: in defence of the passive voice” 26 September 2017
Financial Times – “Correlation crash clears way for stock pickers” 01 September 2017

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