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Big debate: passive versus active
20 May 2013
Andrew Sheen talks to David Schofield, president of
international division, Intech, and Adam Patti, chief
executive of IndexIQ, about active and passive methods
to access low volatility investments
low volatility investments
A. What is the best way to access low volatility investments?
Schofield (active manager): There are four clear reasons why active approaches are better than passive. First, estimating volatility accurately and reliably requires a great deal of skill and proprietary risk models. Passive approaches tend to use basic methodologies, often using simplistic or off-the-shelf risk models.
Second, to truly reduce volatility in an equity portfolio, it is necessary to actively and opportunistically trade in and out of stocks. Third, overall market volatility changes over time and active managers are able to adjust the make-up of their portfolios as needed, based on market conditions.
Passive funds do not have this flexibility. Lastly, because of the simplistic methods used to construct passive low-volatility portfolios, the resulting portfolios are often strongly overlapping. This homogeneity, exacerbated by only a few passive options being in wide use, might cause the stocks held to become overvalued,...
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