A Pointless Distinction

Active or passive – what is the better way to invest? In the view of Kurt von Storch, Co-Founder and Director of Flossbach von Storch, this question is not important. Investors should be concentrating on other things.

Kurt von Storch

“We are continuously asked which way is better for an investor. Is it better to use actively managed investment funds or passive products that replicate equity or bond indices, namely ETFs? The question is often rhetorical in nature, as some investors have already made up their minds long ago,” Kurt von Storch replies. “They are convinced that ETFs are a better alternative to actively managed funds because they are less costly. They normally also add that their fund managers are unable anyway to perform better than the broad market.”

“It probably will not surprise you to learn that as an active investment manager we have little to say about this question. In our view, it is pointless. What market does it concern? Equities, bonds, commodities, gold? Or perhaps a little of each – and if so, how much? The passive part of investing can only begin once the important questions have been actively answered. This particularly applies to investors who are not tied to a clearly defined asset class. Each individual decision is then “active” – and can lead to significant differences in terms of performance. In our opinion, dogmatically drawing a distinction between active and passive investments is of no help to anyone.”

That does not mean, however, that ETFs should play no part in sensible portfolio management. “Quite the contrary! We think they are simple and, above all, low-cost tools for replicating certain markets. We also use them for clearly defined topic areas, such as precious metals.” “Our clients, however, generally ask us to perform much more complex tasks. They almost never ask us to “buy only German equities or US bonds”. Most of our clients specify the expected returns and risks they are prepared to tolerate, and we have then to create an appropriate combination of the two.”

Costs are always an issue in this respect. Says von Storch: “In our company, we use in-house analysis tools to develop a number of different scenarios and try to allocate a client’s assets among the different asset classes in the best way possible. In addition to absolute returns, we also take into account the price fluctuations that investors have to bear at times. The lower, the better. The long-term success of this method justifies an appropriate fee.”

Both strategies – i.e. well managed, truly active investment funds and ETFs – are justified, and they complement each other well. “We feel, however, that pseudo-actively managed funds that systematically depend on, and largely replicate, an index should be given less importance. The likelihood of them systematically outperforming the market after expenses is essentially zero. Investors could, therefore, be less likely to invest in such products in the future,” Kurt von Storch concludes.