Recently, one of Invesco’s funds – Trimark International Companies Fund – was singled out for praise as an example that true active management can outperform. While the kudos were well-deserved for the team, it appeared as part of a commentary that was otherwise unsympathetic to active management.
The arguments were familiar: passive exchange-traded funds (ETFs) are cheap, liquid, easy to understand and have delivered superior returns compared with actively managed mutual funds.
At Invesco, we believe the active versus passive debate should be considered over – and the industry should lead a new conversation, one focused on individual investor needs and portfolio outcomes. As a long-standing provider of both non-benchmark-centric actively managed funds and smart beta factor-based ETFs, we recognize and embrace their differences.
In fact, our fundamental belief has always been that harnessing the diversity of our investment capabilities allows us to deliver the unique investment outcomes our clients seek, using whatever investment vehicles make the most sense for an individual’s needs. This was demonstrated by the 2009 integration of our PowerShares ETF franchise.
Very often, the “right” portfolio for any given investor may include a combination of active and passive products. Investors – both advised and do-it-yourself – are best served by focusing on outcomes, rather than solely on investment strategy.
ETFs are generally touted as providing a low-cost advantage, but any discussion that begins with comparing a Series A mutual fund with an ETF is misleading. The cost of ETF ownership does not include the cost of advice, whereas a Series A fund does. Comparing the two goes well beyond “apples to oranges.” It’s more like comparing apples to apple pie – the basic ingredient versus the higher-value finished product.
Make no mistake, the ETF can be a fantastic tool for accessing specific investment factors or to provide exposure to highly efficient markets, like U.S. large caps.
But in less efficient markets, such as small caps, international and emerging markets, an active manager’s risk-mitigation skills can provide outperformance over a portfolio that simply tracks the benchmark index. The old adage is true – sometimes you get what you pay for.
The importance of value for cost becomes especially important when selecting an actively managed mutual fund. The reality of today’s crowded mutual fund marketplace is that many active managers hug their benchmarks and likely don’t provide value beyond an index-driven strategy. Our active suite of high-conviction, concentrated mutual fund mandates aims to deliver above-benchmark returns over the long term by investing beyond the benchmark. In short, our funds don’t look like an index. They have high active share1, meaning that more often than not, the portfolio doesn’t hold the same companies as the index.
While active share is a key missing ingredient in most active versus passive discussions, there are also significant structural differences between mutual funds and ETFs, many of which are easily distorted in broad-strokes analyses.
I do believe that both solutions will continue to thrive as the investment landscape evolves. It doesn’t have to be one or the other – both have a place in a properly diversified outcome-focused portfolio.