Investors have been debating the merits of “active” versus “passive” investing for a while now. We break down those concepts and explain how a blended strategy may benefit your portfolio.
In my work at Morgan Stanley Wealth Management, I spend a lot of time thinking about how to construct investment portfolios—and these days, a big part of that conversation centers on the role of active and passive styles of investing, an ongoing (and sometimes quite heated!) debate in the financial industry.
This isn’t just an academic conversation: It has the potential to affect your investment results in a real and meaningful way.
Active investing means investing in funds whose portfolio managers select investments based on an independent assessment of their worth—essentially, trying to choose the most attractive investments. Generally speaking, the goal of active managers is to “beat the market,” or outperform certain standard benchmarks. For example, if you’re an active US equity investor, your goal may be to achieve better returns than the S&P 500 or Russell 3000.
If you’re a passive investor, you wouldn’t undergo the process of assessing the virtue of any specific investment. Your goal would be to match the performance of certain market indexes rather than trying to outperform them. Passive managers simply seek to own all the stocks in a given market index, in the proportion they are held in that index. Because active investing is generally more expensive (you need to pay research analysts and portfolio managers, as well as additional costs due to more frequent trading), many active managers fail to beat the index after accounting for expenses—consequently, passive investing has often outperformed active because of its lower fees.
There’s more to the question of whether to invest passively or actively than that high level picture, however. Active strategies have tended to benefit investors more in certain investing climates, and passive strategies have tended to outperform in others. For example, when the market is volatile or the economy is weakening, active managers may outperform more often than when it is not. Conversely, when specific securities within the market are moving in unison or equity valuations are more uniform, passive strategies may be the better way to go. Depending on the opportunity in different sectors of the capital markets, investors may be able to benefit from mixing both passive and active strategies—the best of both worlds, if you will—in a way that leverages these insights. Market conditions change all the time, however, so it often takes an informed eye to decide when and how much to skew toward passive as opposed to active investments.
If pursuing a “best of both worlds” approach, it is also worth noting that achieving consistently successful active management has historically proven more difficult within select asset classes and portions of the market, such as among the stocks of large U.S. companies. As a result, it may make sense, if appropriate for your situation, to veer a bit more passive in those areas and rely more on active investing in asset classes and parts of the market where it has historically proven more profitable to do so, such as among international stocks in the emerging markets and those of smaller U.S. companies.
Some investors have very strong opinions about this topic and may not be persuaded by our nuanced view that both approaches may have a place in investors’ portfolios. If your top priority as an investor is to reduce your fees and trading costs, period, an all-passive portfolio might make sense for you. In our experience, investors tend to care more about factors like risk, return and liquidity than they do fees, so we believe that a mixed approach may be beneficial for all investors—conservative and aggressive alike.
As with many choices investors face, it really comes down to your personal priorities, timelines and goals.
Morgan Stanley’s Access InvestingTM (“Access Investing”) portfolios have performed with recognition by Backend BenchmarkingTM in its Robo ReportTM, an independent publication that tracks 91 accounts offered at 42 different Robo advisors. Access Investing was awarded two Q1 2021 performance badges: one for the 3-year period ending 3/31/2021 and another for the 1-year period ending 3/31/2021.
- Ranked 1st Place out of 17 taxable robo-adviser portfolios with three-year trailing records tracked by Backend Benchmarking for Access Investing’s Socially Responsible Investing portfolio
- Ranked 2nd Place out of 59 taxable robo-adviser portfolios with one-year trailing records tracked by Backend Benchmarking for Access Investing’s Robotics + Data + Artificial Intelligence portfolio
We believe that these awards illustrate how our active-passive approach to investing, backed by Morgan Stanley’s 85 years of expertise, is a powerful combination that can help generate positive results for your portfolio.
Morgan Stanley’s Robo advisor, Access Investing offers a passive-only all-ETF investment strategy. However, unlike many passive-only Robo advisors, the majority of Access Investing offerings combine both active and passive strategies to help yield favorable results over time. Blending active and passive investment strategies based on current and potential market conditions may help improve results, manage costs and reduce risk.
Access Investing’s hybrid approach is guided by Morgan Stanley’s Global Investment Committee that determines the mix of active mutual funds and passive exchange-traded funds that is well positioned to provide attractive results based on their unique view of the capital markets. Get started today.