Advisors can have the advantages of active investing yet simultaneously enjoy the benefits of passive strategies.
Such is the promise of a money manager who offers the best of both strategies through a blended style he calls “pactive” investing. It is the active use of passive investment vehicles such as ETFs and macroeconomic analysis, according to Richard Bernstein, the founder of his own money management firm, Richard Bernstein Advisors (RBA).
The pactive approach gets the best of both worlds by changing the debate over whether passive or active is the best long-term strategy, he says.
“It really doesn’t make any difference whether it is active versus passive,” he said at a recent conference. “The most important question to ask is what do you buy and when.”
“RBA is a top-down, macro investment manager,” Bernstein wrote in a letter to investors explaining his firm. That means he’s putting little emphasis on individual stock selection.
“About 90% of the risk that we take in this portfolio is macro factor risk, whereas only about 10% is attributable to stock selection. A high-concentration stock-picking strategy would likely be the exact opposite, i.e., 90% of the risk would be stock selection risk and there would be very little macro risk,” Bernstein wrote.
His firm has some $6.5 billion in assets. Bernstein says pactive, a term that the firm has trademarked, has many advantages. That’s because it takes a unique approach to risk, he says. (Please see the sidebar, “Bernstein’s Arguments for Pactive Investing.”)
But some argue that the pactive approach is another kind of smart beta, getting the best of index investing with less risk because one doesn’t stick to one style.
Various kinds of blended investing strategies have been around for decades. Pactive is one of a group of flexible investing concepts that came out of the tech crash of 2001, after so many investors were burned by excessive risk, says Chris Brightman, chief investment officer of Research Affiliates. Pactive investing, Brightman adds, is an important trend that has been going on for the last decade.
Bernstein’s Passive-Active Strategy
April 2, 2018
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Comments
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Richard, well said. You stated the following: "It really doesn’t make any difference whether it is active versus passive,†he said at a recent conference. “The most important question to ask is what do you buy and when.†I agree. A primary way of measuring investment results is risk-adjusted rate of return. Factoring in Beta, Sharpe Ratio, Drawdown or Standard Deviation are ways of adjusting the rate of return to determine how much risk was taken to achieve a given rate of return. I see active management as a very effective tool to achieve that - the way I do it, at least. However, I am open to other methods. It should not matter how we get there, but what are the results. When I say this, I realize that most investment professionals disagree with me. That is OK. If that is the case, we can agree to disagree. Thank you again for your article.
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Please let's not use the "trademarked" Pactive word ever again! Passive and active?! Ummm. Mr. Bernstein people have been doing this since time immemorial. Active allocating among Vanguard funds - Pactive? or, buy-and-holding Fidelity funds - Pactive? C'mon, really? I'm frankly a bit embarrassed for Mr. Bernstein for coming up with this marketing gimmick, as he has contributed significantly to asset allocation theory in the past.