Have We Reached Peak Passive?

 

The active vs. passive debate reached a fever pitch on Monday when Jeff Gundlach referred to passive investing as a ‘mania.’  As expected, Vanguard quickly defended passive index funds by saying that “the data simply does not support his claims.” There is certainly nothing new about this debate.  It’s been escalating since the first index funds were launched in the mid-70’s.  However, moments like this remind the Blueprint team why we utilize passive index funds in the first place –they are the tools we use to build portfolios on behalf of our clients.

 

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Indexes Are Tools

We regard almost all assets (e.g. stocks, bonds, ETFs, mutual funds, alternatives, and even derivatives) as tools and nothing more.  For us, all that matters is the instrument’s behavior relative to the asset class in question.  If stocks (or any other asset class) are going higher, we want to utilize a tool that captures that behavior.  In that sense, a debate about passive versus active, or ETFs versus Mutual Funds, misses the point. And it distracts advisors and their clients from the most important aspect of investing - What is your strategy and how will you implement it?

 

Design, Build and Execute

Rather than fixate on a few basis points performance gap here or there between products, advisors should focus on employing strategies that give their clients the highest probability of meeting their financial goals.  In the portfolio design and management process, we ask ourselves, what is the most efficient tool to accomplish our stated objective?  Our answer almost always comes back to passive indexes.  We primarily utilize passive investments because they are:

  • Rules-based and systematic
  • Completely transparent – no discretionary or emotional influence leads to tracking error
  • Less expensive vs. average active counterparts
  • Commission free at most major custodians

 

Systematic AND Efficient

Our primary objective at Blueprint is to capture these advantages and fuse the benefits of risk management, technology and efficiency to deliver a powerful investment solution.  Given that passive instruments are our primary input, how we utilize them to execute our strategy is of the utmost importance.  Below is an example of how our asset allocation process systematically ebbs and flows across these passive instruments, and utilizes the tools to build and adjust the portfolio over time.

 

How we utilize passive instruments:

1) Create diversified portfolio of major asset classes comprised of passive instruments

PeakPassiveGraphic1

 

 2) Utilize time diversification and trend following to drive asset allocation decisions

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This process resulted in a nearly optimal global equity allocation throughout 2018.

 

Total Equity Exposure – Blueprint Growth Strategy (S20)

(Apr ’18 – Dec ’18)

PeakPassiveGraphic3

This is not a recommendation of any security or strategy. Intended for informational purposes only. Past performance is not indicative of future results.

 

Active or Passive

In our view, whether you choose an active fund manager or passive index, the incremental difference between the two pales in comparison to the larger portfolio management aspects of how you execute the strategy.   Our focus is on systematic decision-making, investor behavioral considerations and time and asset diversification.  This year, 2018, has shown us all that regardless of the tool, the choice and execution of the process is ultimately, what matters. 

In a sense we agree with Jeff Gundlach - purely passive investing is not the right approach. Buy and hold investors are surely feeling a lot of pain right now if they are holding a portfolio of passive instruments.  We believe an active and systematic process utilizing passive instruments as tools is the most effective strategy – and this belief is evidence based and strengthened by results.

 


 

For more evidence on ways to systematize your investment approach, visit www.blueprintip.com

 

Past performance does not guarantee future results. This document has been provided to you solely for information purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Diversification does not eliminate the risk of experiencing investment losses. Please note that changes in the rate of exchange of a currency may affect the value, price or income of an investment adversely. The factual information set forth herein has been obtained or derived from sources believed by the author and Blueprint Investment Partners LLC (“Blueprint”) to be reliable but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information’s accuracy or completeness, nor should the attached information serve as the basis of any investment decision. Information contained on third party websites that Blueprint Investment Partners LLC (“Blueprint”) may link to are not reviewed in their entirety for accuracy and Blueprint assumes no liability for the information contained on these websites. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission from Blueprint.

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