An active investor is one who makes decisions about holding one investment over another. Most active investing is done with the use of active, stock-picking fund managers, in other words through mutual funds or an open-ended investment company (OEIC). Passive investors, on the other hand, are willing to accept the market rate of return and usually pay smaller fees than active investors. Most passive investing is done with the use of passive tracker funds and/or ETFs.
Research demonstrates that the average fund manager does not generate enough excess return over and above the market return to justify their fees. This is used as the primary argument against active fund management and in support of trackers.
Research also indicates that a certain percentage of active fund managers do outperform. However, as that list of outperforming managers is a moving target, it is clearly a difficult - if not impossible - task to consistently identify when to buy and when to sell those managers.
On the other hand, tracker funds and ETFs that track indices, display significant tracking errors in the indices they seek to track. Those tracking errors can be well in excess of the fees that active managers charge. In addition, the indexes that passive managers track vary significantly, are decidedly random in their construction and create trading strategy problems for passive funds. ETFs display complexity and counter-party risks that make them very hard for the average investor to fully understand.
Our investment philosophy is to be neither passive nor active, but to use the best of both and mitigate against the risks of each. Our investment process targets market-beating performance through structured exposure to dimensions of higher expected return and uses methods of portfolio construction and implementation that enhance performance relative to the average investor. We believe that over time:
The average active investor will do worse than the market because they are paying the highest fees
The average index investor will perform slightly better than that because their fees are lower than the active investor