Global Economic Outlook: Recession, Interrupted 

abrdn

June 2023

Funds operated by this manager:

Aberdeen Standard Actively Hedged International Equities Fund, Aberdeen Standard Asian Opportunities Fund, Aberdeen Standard Australian Small Companies Fund, Aberdeen Standard Emerging Opportunities Fund, Aberdeen Standard Ex-20 Australian Equities Fund (Class A), Aberdeen Standard Focused Sustainable Australian Equity Fund, Aberdeen Standard Fully Hedged International Equities Fund, Aberdeen Standard Global Absolute Return Strategies Fund, Aberdeen Standard Global Corporate Bond Fund, Aberdeen Standard International Equity Fund, Aberdeen Standard Multi Asset Real Return Fund, Aberdeen Standard Multi-Asset Income Fund

Investing Essentials: Active vs passive

Bennelong Funds Management

June 2023

Firstly, let's clarify the difference.

A passively managed fund is designed to minimise decision-making and keep costs down. The most common types of passively managed funds are index funds, which replicate the movements (and therefore returns) of a particular benchmark index. These funds are set up so their performance will effectively mirror that of the index - meaning the fund won't outperform the index, but won't underperform it either.

An actively managed fund aims to outperform a particular index or benchmark over a defined period of time, with a portfolio manager using research and expertise to select individual securities they believe will perform best. There is also, therefore, a risk of underperforming the benchmark.

What sometimes gets lost in the argument of 'which is better' is a genuine understanding of the different approaches - and, importantly, how they can both benefit you as an investor at different times.

In a constant effort by investors to reduce fees, the popularity of index funds is understandable. But in a world where performance is becoming harder to come by, an actively managed fund - where investment choices are based on analysis, research, and market knowledge and experience - might be a more attractive option.

When deciding on an investment approach, there are three important things you should consider.

1. Your objectives

If you're looking for a market level return and you're comfortable with the characteristics of a particular asset class and its benchmark (such as the ASX300 for Australian equities), an index fund could suit your requirements. In terms of performance, whatever the market does is what you'll get - there's no flexibility around this.

If you want to try and outperform the market, need a particular style of return (such as income), or have a bias towards a particular characteristic or type of stock, then you could consider an actively managed fund.

2. Fees

There are no active investment decisions involved in managing an index fund, so a comparatively smaller investment team is required. As a result, index funds usually have a lower management fee than actively managed funds.

In an actively managed fund, the investment team will usually conduct assessment and analysis of individual shares as well as the broader economy and other relevant factors. Given the resources involved in this, and the fact that an active manager expects to outperform its benchmark, actively managed funds tend to have a higher cost than index funds.

In the drive to reduce fees and get 'value for money', investors can sometimes become hung up on the investment's cost rather than its outcome. Make sure your investment strategy is aligned to your goals, and you understand the difference between price paid and value received.

3. Investment manager

Because it only ever matches an index, an index fund will essentially always do what it says on the tin. If the index goes up, performance goes up, and vice versa.

But when it comes to choosing an active manager, not all funds are created equal. This is also why it can be hard to compare the performance of active and passive funds: there are wild variances between active managers, styles, investment approaches, risk, etc.

Do your research when it comes to a manager's style, process and philosophy. Do you understand how the fund is managed? Are you clear on what it's aiming to achieve? Above all, though, always remember that past performance is not an indicator of future performance - one of the most important rules of investing!

There's no doubt that the debate around 'active versus passive' will continue. But, as with all investments, the key for investors is to be clear on what your own purpose or objective is, and then select the funds that best align to achieving your goals. It doesn't have to be either/or - adopting an investment strategy that combines active and passive elements may in fact deliver the best of both worlds

For more insights visit www.bennelongfunds.com

Disclaimer

The content contained in this article represents the opinions of the author/s. The author/s may hold either long or short positions in securities of various companies discussed in the article. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely as an avenue for the author/s to express their personal views on investing and for the entertainment of the reader.

Hedge Clippings | 14 July 2023

Have We Reached the Tipping Point of Inflation?

As widely predicted by all and sundry, and frequently hinted by Treasurer Jim Chalmers, RBA Governor Philip Lowe's seven year tenure will end in September, to be replaced by current Deputy Governor, Michele Bullock. While there's a change at the top, and about to be widespread changes to the bank's board structure and decision making, the appointment provides continuity of the outgoing Governor's thought processes - assuming there was cohesion and agreement between the two over the past couple of years.

We'd expect that to be the case. Both are longstanding RBA employees, Bullock with 38 years under her belt, whilst Lowe has 43. Jim Chalmers noted that the incoming Governor will provide a "fresh perspective", but we doubt it will cause major underlying changes to the overall approach, or the bank's actions when it comes to interest rates.

Lowe has taken all the heat from the rate rises that the RBA has announced over the past 15 months, and of course for his earlier comments that rates wouldn't rise from an unprecedented 0.1% until 2024. Those earlier comments have been used by all and sundry, plus Chalmers and Albanese, to point the blame at Lowe for the fact that global inflation has caused rates to rise across the western world. The fact is that Australia's inflation rate is less than the UK's, on a par with the Eurozone, and until this week's surprise number, the US as well. Australia's cash rate at 4.1% is less than both the UK and the US, both at 5.0%.

The government has been happy for Lowe to be blamed, having done nothing to help. In fact, they did the opposite by supporting wages rises that are yet to flow through the system. They've done nothing to try to control the inflationary impact of higher energy costs in a country where exports account for 70% of thermal coal production, and 82% of our gas. According to the Australia Institute as of 2020, only 1% of the gas produced in Australia is used in Australian manufacturing, less than 10% of the amount the LNG export industry uses itself. Twice as much gas is used just running gas export terminals as is used by Australian households. Whilst we're proud capitalists, and not fans of government control, one would have thought Canberra (on both sides of politics) might have stepped in somewhere or somehow along the line.

For Bullock, the timing couldn't be better, and in our humble opinion she's a good choice. She's perfectly qualified, full of appropriate experience, and after 38 years, understands the bank.  She comes in at a time of change, but will presumably maintain the current course. And for Chalmers, it allows the blame for mortgage pain to be laid squarely at the feet of Philip Lowe, just as it looks as if he might have achieved his "narrow path" balancing high inflation, low growth, and close to full employment. Just in time US inflation numbers have peaked, with this week's annual figure at 3%, down from 9.1% a year ago.

With the delayed effects of the 13 rate rises to date working their way through the system, we may, or may not, see a (mild) recession by the end of the year. If we avoid one, we'll no doubt hear all about it from Dr. Chalmers, but how much credit he'll give to Philip Lowe is less certain.

The CPI numbers due on 26th July will be critical.

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