Quick bite: How diversified funds blur the active & passive line

In this quick bite, Anna Scott, CEO of Smart demystifies the blurred line between active and passive investing in diversified funds. What strategic decisions are made even in "passive" portfolios? Why are league tables and quartile rankings so important when comparing diversified funds? Plus, insights on tactical asset allocation  and why there's no simple benchmark for comparing diversified fund performance.

This quick bite is from 'Active or Passive part 2: Passive'. For more or to watch on YouTube—check out http://linktr.ee/sharedlunch

For more or to watch on YouTube—check out http://linktr.ee/sharedlunch

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Episode Transcript

Speaker 1 (00:01):
You're listening to a Shasise podcast. One thing I think
that we think about when we think about active and
passive is and this is why I continue to talk
about index tracking, because if there's an index in a market,
then that's what you're doing. In a passive fund, that's
your job right to replicate. In mirror key, we Savor
in New Zealand has really grown this area of interest

(00:21):
in a diversified fund, so that has broad in new complexity.
When you get into a diversified fund, anybody, regardless of
whether you're using index tracking, building blocks or stock selection,
you're making a active choice on how you build that
diversified fund. And so that's where the line I think

(00:41):
that blurs between passive and active. So, yes, it's smart.
Do we have a bunch of index tracking etips? Absolutely
we do. Do we also under the super Life brand
that we're going to change to Smart, have diversified fund
We have those two. You need extra acid allocation expertise
to go into that, so give you a little bit
more color, give you a little bit cost as well
from the sound of it too. Absolutely, but that's where

(01:03):
you get the extra expertise. So we talk about how
risk tolerant. Are you you might be conservative or balanced
or growth. With that becomes a pretty global standard way
of thinking how you spread your assets for that. So
a balance portfolio pretty traditionally is sixty percent in equities
which are called growth assets, forty percent in bonds or

(01:25):
fixed income or defensive stable assets. That's the worldwide acknowledged.
You can chat GPT that and will tell you what
your standard asset allocation is. Right. So from there, right,
we've started at the top. We've got some growth, some stability.
That's the balance. But underneath that you've got asset categories.
You've got New Zealand equities, Australian equities, International, the Europe.

(01:45):
You've got fixed income which comes into your stable. You've
also got cash and increasingly you've got alternative assets, so
you have to look at those in that. You've got commodities.
We've talked about gold before as a great diversifier. You've
got property that's become listed properly, become really popular and
far more standard in terms of that. So you've got
asset categories. Then what you do as a fund manager

(02:06):
and say, right, well, if those are the core ingredients,
what's my strategic acid allocation. So when I break down
the sixty forty, how do I make that up? And
in that zone, we're all making a decision about where
our target waiting is in any of those asset categories
and what our range is. So you set that'll be
in the SIPO and that's what you're set with. But

(02:27):
then within that you have tactical plays. So even though
you might be labeled a passive fund manager, when you're
buying a diversified fund that's growth or balanced, we're all
making conscious choices around acid allocation. So here it's smart.
When we choose our diversified fund, we will build that
up with index tracking building blocks because we think that

(02:50):
those are tracking the market and are a good lower
cost alternative. So that's how we build it. But we
still need to put that together and know how our
acid l cation looks. If you're an active fund manager,
you've got the same acid allocation that you're working on,
but at the lower level of fund you might choose
instead of having index tracking funds, you might choose to
build it up via active stock selection, so you're picking

(03:13):
individual names, individual companies to build, which is a little
bit more intensive, but potentially gives you exposure to greater
greater gain, but greater losses. Well yeah, and so there's
a whole lot more onus there on doing the research,
finding the right companies and doing that. The tricky thing
for investors, I think with the diversified fund is there's
no easy benchmark or index. So there's no global New

(03:36):
Zealand based investor balanced risk profile, there's no index for that.
So it's really hard to compare the performance of our
diversified funds. And that's why it comes into league tables
and why people constantly talk in that space around as
your fund performing in the top quart aisle or not,
and where does it rank versus its peers. But we're

(03:56):
all going to be slightly different in our acid allocation
that we've employed and the width of our ranges and
where we can tactically tilt given market conditions. So we
might hold more in cash right now, less in international equities,
and we can do that because that's within an acid
allocation guideline rather than very specifically having to track to
there's no global common standard of what a diversified fund

(04:20):
should look like. Investing involves risk. You might lose the
money you start with we recommend talking to a licensed
financial advisor. We also recommend reading product disclosure documents before
deciding to invest