As investors, we all have access to a staggering array of investment products and strategies. Although this can sometimes be overwhelming, ultimately these different approaches all fall into one of two broad classifications – actively managed investments and passively managed investments.

At Six Park, we are strong advocates of passive investing – although we believe this should be combined with an engaged and thoughtful approach that continuously reviews asset allocation and portfolio management.

Active investing focuses on trying to ‘pick winners’ – that is, selecting investments that are expected to have the best chance of outperforming the market as a whole. This often involves the use of professional fund managers and financial advisers who identify investments they believe are likely to deliver the best overall returns. Active investors also aim to ‘time the market’ in order to maximise returns and will adjust their asset weightings and exposures to try to take advantage of market surges and contractions.

While an active management style can involve a broad range of methods and techniques – whether it be so-called fundamental analysis of financial performance, technical analysis of trading patterns or macroeconomic analysis of market themes – all these approaches have the common goal of attempting to identify and profit from future investment trends.

Passive investing doesn’t focus on distinguishing between investment opportunities, forecasting likely prices or timing the market. Rather than selecting individual investments in an attempt to outperform a particular market index, passive managers invest broadly within and across the entire index of interest. They effectively ‘buy’ the whole index in which they are interested, allocating their funds across every share/bond in the same proportion that those shares/bonds represent of the index that they are seeking to track. By doing this, passive investors ensure their portfolios mimic the performance of their targeted index. While this means they trade off the opportunity to ‘outperform the market’, it also ensures they avoid the risk of significantly underperforming the market at the same time.

While picking stocks and timing the market can deliver strong performance from time to time, the odds of being able to consistently and meaningfully outperform a passive investment approach are slim – particularly over the longer term and once trading costs and fees are taken into account. In our view, it is extremely difficult to pick winners and/or time the market – even for the most skilled professional fund managers and advisers.

There is a growing body of research – both in Australia and around the world – which shows that the vast majority of active managers don’t outperform the market on a consistent and persistent basis. Ongoing research by S&P Dow Jones Indices LLC provides this global data, which has also found that about 80% of Australian equity funds fail to outperform their benchmark index, the ASX200, over five years. This result is mirrored in other developed economies such as the US, Europe and Canada.

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