Active v passive management

Thursday 05 October 2017

Investing insights

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In this article I hope to illustrate a couple of key points to consider when selecting an investment manager.

Know your returns

As an investor, it is vitally important to know the return you receive on your investments. Only then are you able to evaluate an alternative investment option. To calculate your return, you may use the simple formula below.

Investment Total Return Formula (%):


Assume your portfolio value on 1 July 2016 was $100,000. The portfolio ending value on 30 June 2017 was $107,000. The dividends received over the year amounted to $3,000.

Investment Total Return (%):

Now you know your investment return, you are able to compare it to a relevant benchmark.

Compare your returns

An appropriate benchmark is a perfect yardstick for measuring investment performance. It provides an objective number that can be compared directly with your return. Assuming your portfolio is invested in Australia, the appropriate benchmark is the ASX All Ordinaries Accumulation Index. Remember, you should be comparing against the Accumulation Index which includes dividends. We discussed this in our recent blog, Dirty Secrets Fund Managers Do Not Want You To Know.

The return on the ASX All Ordinaries Accumulation Index from 1 July 2016 to 30 June 2017 was 13.1%. If your portfolio did not return at least 13.1%, then you should be concerned. Why? Because you would have received almost 13.1% investing in a passive low-cost index fund, which generally charge a very small management fee. An Index Fund is a mutual fund seeking to replicate the performance of a specific Index. One of the largest Index Fund providers is Vanguard which manages over $4.2 trillion dollars globally.

Select the right product

Assuming your investment portfolio and the index have similar risk profiles, you can make an informed decision about where you would like to invest based on performance. Index Funds beat nearly 80% of all active managers¹. An active manager is a term used to describe an investor seeking to beat the index through stock selection. If you desire to beat the index after fees, you need to carefully select an active manager who is beating their index, as fewer than 20% of active managers outperform their benchmark over time.

¹S&P Dow Jones Indices SPIVA Australia Scorecard for Australian & International Managers – 10 years to 31 December 2016

The information provided in this document is of a general nature only, is not personal investment advice and has been prepared without taking into account your investment objectives, financial situation or particular needs (including financial and taxation issues). Investors should read and consider the investment in full and seek advice from their financial adviser or other professional adviser before deciding to invest.

About the Author
Lachlan Hughes, CFA

Lachlan Hughes, CFA

Chief Investment Officer

Lachlan founded Swell Asset Management in 2014, wanting to create a unique investment offering – a global portfolio with a genuine long term focus. He is the CIO, with responsibility for all investment decisions of the Swell Global Portfolio. Previously he was a Senior Analyst with NovaPort Capital, a boutique fund manager owned by Challenger Limited. Prior to that, Lachlan was a corporate lawyer working with King & Wood Mallesons, The Bank of New York (London), and Allco Finance Group.

Lachlan earned the right to use the CFA designation granted by the CFA Institute in 2010. His professional qualifications include a Bachelor of Commerce (Finance) and a Bachelor of Laws.