Active asset management versus passive asset management

so sánh điểm giống nhau và khác biệt giữa hai phương thức đầu tư chủ động và đầu tư bị động. xu hướng cachs nhà đầu tư trên thế giới đang theo đuổi để dạt lợi nhuận vượt trội, từ đó liên hệ đến thị trường chứng khoán tại Vietnam ( english version)

Topic 1: Active Asset Management versus Passive Asset Management.

It is true that the issues related to a passive investment strategy versus an active investment have become one of the most controversial issues of both academics and investors This essay will analyze the principal problems and offer some personal insights on both methods

1 Active Investment Strategy

Portfolio management in an active way is based on analysis of securities combined with the macroeconomic situation of portfolio managers Investors or fund managers will analyze the business situation of the companies, the macroeconomic situation is analyzed carefully and frequently to select stocks with high growth potential in the long term.(Mauboussin, 2001) Active investment means that investors can decide to stop trading when the market shows signs

of uncertainty or sell orders if the market is in crisis, investors not only survive the storm but also profit from it

Often in underdeveloped or unsustainable markets will have the best chance of making a profit Portfolio managers try to buy low-priced bonds, hold them until prices rise and sell these bonds

to maturity for arbitrage

Such aggressive investment is much more flexible than investors simply buying and holding stocks In short, active investment management attempts to “beat the market.” The goal of active management is to take full advantage of short-term price fluctuations and try to determine where and when that price will change (Andrew Ang, 2010)

2 Passive Investment Strategy

Unlike active portfolio managers, index managers can’t sell poorly run companies They must buy every stock in a given index and keep it as long as it stays in the index As a result, index managers typically own a broad swath of the market and often hold those stocks indefinitely This encourages them to focus on issues that could have a bearing on shareholders’ outcomes over the long-term.(Morningstar, 2014)

This strategy is most commonly understood as a buy-and-hold strategy where investors buy and hold securities for a long time, during which time they almost had no adjustment or minimal adjustment of the that portfolio

Passive strategy is encouraged by Efficient Market Hypothesis of which there are three versions (Fama, 1965, 1970) The weak form means pass informations reflect on current price (based on information in the past, the speculators did not beat the market) The semi-strong form says stock prices have been fully affected by information disclosed in the past and information has just

announced Thus, speculators can not rely on that information to be able to buy low sell high, as soon as the information is published, the stock price has changed The strong form of this theory further confirms the effectiveness of the financial market that the price of the stock reflects all past, current and insider information Followers of EMH do not controvert that actively managed funds can beat passively managed funds, this would only happend through short-term luck and could not be systematically achieved, especially net of investment and trading costs, however For instance, 230 mutual funds were investigated by Bollen and Busse (2005) and they found any superior performance disappeared after one year from 1985 to 1995 Carhart (1997)

discovered the same result for 1900 mutual funds studied from 1962 to 1993 Therefore, there is

no need to look for the wrongly priced securities and buy and sell securities actively Investors who pursue passive strategies often diversify their portfolio to make their portfolio match a stock index

Consequently, passive strategies are often referred to as match-index strategies The most purely passive strategy is to strategically match the index completely According to this strategy,

investors will choose a benchmark such as the S & P 500 Their portfolio has fallen exactly as the S & P 500 index is falling For example, Apple accounting for 22% of the S & P 500 index , the portfolio also holds 22% of Apple In Vietnam, VN-Index, VN30, VN100… will be selected

as a benchmark

3 Investment trends in the world

David Swensen is an investment expert, author of several books and former investment manager

of Yale Investment Fund He is a prime example of index investment In his book

“Unconventional Success”, published in 2005, he writes “Most individual investors lack of the expertise that needed to succeed in in the increasingly competitive investment market today. As

a result, passive index funds are the best choice for these investors"

Index mutual funds are a simple and almost safe investment method cause investing in many market segments, spreading risk.These funds are often used by investors who have a little

experience or skilled investment professionals with large portfolios

There are several seminal publications supporting passive investment strategies Treynor (1965) pioneered the idea of measuring and incorporating risk in the calculation of investment returns Sharpe (1966) and Jensen (1968) performed the early tests of comparing the returns of active mutual fund managers to the returns from a broad passively managed portfolio, such as based on the Dow-Jones Industrial Average Sharpe (1966) concluded actively managed portfolios yielded

no consistently superior performance after deducting management costs Jensen’s (1968) results were even bolder—actively managed funds could not provide superior returns even if

cost returns over long investment periods Asebedo and Grable (2004) found that paying for active management through mutual funds with higher fees yielded inferior performance

compared to the returns from funds with low fees

Index mutual funds are a simple and almost safe investment method cause investing in many market segments, spreading risk These funds are often used by investors who have a little experience or skilled investment professionals with large portfolios

figure 1: investors choose index funds

Morningstar notes that the amount shovelled into passive funds in 2016 was more than four times that of active funds (Research, December 2017)Passive investing has become a hot issue

In present, accounts for a larger share of publicly traded assets

figure 2: Surveyed Manager AUM Split Into Passive and Active ($ Billion)

The table above illustrates three biggest asset managers which are BlackRock, Vanguard, SSGA seem to like passive inesting rather than active investing More than half of their assets are passive

Figure 3: 7 Funs to Beat the Index

According to Mark Carhart (1997) study of large US mutual fund showed that mutual fund only beat the market 1/3 time, also according to Morningstar research (2017) (Figure 3), so far only about 7 mutual funds can beat the market

Figure 4 : Global Fund Assets Split Into Active and Passive ($ Trillion)

In august 2017, according to ETFGI advisory firm, demand for ETFs rose sharply this year (Figure 4) During the period January-July 2017, investors injected $ 391 billion into ETFs, surpassing a record $ 390 billion last year Thus, index funds have attracted nearly $ 2.8 trillion since the beginning of 2008 Although passive investment is becoming more popular in the world, Global Fund Assets Split Into Active and Passive increasing, only about 25% market funds

4 Active vs Passive Investing - strengths andweaknesses

 Active Investment strategy.

There are two main advantages of active investing Firstly, investors may have the opportunity to earn potentially market-beating returns.(MadisonFund, July 2, 2012.)Active investors believe that they can beat the market by predicting trends and investing in hand-picked stocks

Secondary, investors can flexibly diversify their portfolio They can easily change their porforlio, look for better stocks, or easily make a sale or still hold decision on a stock that is not good

However, this investment still has some shortcomings First of all, human error No matter how

good fund managers are, there is no denying that they will make mistakes and that they will not always be able to beat the market Next, active ivestment have high cost Whether or not to create a return, active fund’s clients still lose a certain amount of fee Even if those funds make a return, investors will also have to deduct a percentage of the fees and commissions The average actively managed stock fund, incurs annual expenses of around 1.3%, or $1.30 for every $100 an investor has in the fund.(WhartonSchool, Feb 02, 2011)

 Pasive Investment strategy.

Compared to active methods, passive methods seem to have more advantages Personally, a passive investment strategy has six advantages Firstly, easy investment.Large funds in the market make it easier to distribute and diversify assets Secondly, better quality management.The passive nature of index investment helps to eliminate mistakes made by managers as in active management mutual funds Thirdly, Investing in indexes is far less costly than active fund

management In a letter that Warren Buffett sent to shareholders of Berkshire Hathaway Inc on

March 25, 2017, he pointed out that in the past 10 years, investors have wasted $ 100 billion on fees, while interest was belong to the managers instead of their customers Investing in the index requires less stock trading, thus reducing the cost of taxes and other expenses Lastly, The investment performance of index funds outperformed active investment funds in the long run Over the 23 years finishing in 2009, while actively managed funds trailed their benchmarks by

an average of one percentage point a year, an index fund would have returned between 9.8% and 9.9%, with a small amount for fees (WhartonSchool, Feb 02, 2011)

Although there are many advantages, passive investment still has certain limitations Limited return is the first weaknesses of this investment Investors who choose this investment strategy will only get a low return even when the market is in a state of turmoil (because this strategy can not beat the market) Secondary, less opportunity than active management Passive investment

investment Returns can be affected by political conditions or regulatory events; investor must always follow on stock market movements and worry when values drop

5 Investment strategy in Vietnam

Refer to the Vietnam’s stock market The stock market in Vietnam is a new market compared to other developed countries in the world However, in the past 10 years, the stock market in

Vietnam has become more active, investors have also begun to learn investment methods in the world, including two main investment procedures being Investors and hedge funds are active investment strategies and passive investment strategies

62%

5%

24%

5%3%

Investmen funds in Vietnam 2018

mutual fund fund certificate Vietnam Equitization Focused Member Fund

ETF real estate funds

Figure 5: Investment Funds in Vietnam 2018

Source: State Securities Commission of Vietnam

According to State Securities Commission of Vietnam, as of 31/01/2018, Vietnam has 37 funds (Figure 5), of which only 02 ETFs account for 5% of the total funds in Vietnam So why does not ETF grow in Vietnam?

Passive investment depends on effective market theory as I mentioned above However, does the Efficient Market Hypothesis work in the real world? Figure3 presents 8 studies on the weak form

of the Vietnam stock market from 2000 to 2013

Figure 6 : Studies on the weak form of the Vietnam stock market over time

2000-2005

2005-2008

2007-2010

2000-2009

2000-2011

2000-2013

2009-2012

2009-2013

Truong Dong x

Pham Vu

Thanh Long x

Vuong Duc

Hoang Quan

x

Nguyen Thu

Hang

x

Nguyen Thi

Bao Khuyen

x

Frances Guidi

& Rakesh

Gupta

x

Phan Khoa

Cuong

Le Chung

Thanh Thao

o

Source: National Institute for Finance

'' x 'is negative for effective market existence,' o 'is to confirm the existence of effective markets in vietnam for the period 2000-2013.

According to 8 studies of 8 different authors on the market in Vietnam for the year 2000-2013, only two studies have identified Vietnam as an effective market That indirectly reflects the passive investment form in Vietnam is not effective

Moreover, the psychology of Vietnamese investors is often too confident and susceptible to fluctuations in the market.(Hien, 2012) Thus, active investing is preferred in Vietnam due to the flexibility of portfolio changes

6 Conclusion

In summary, it is impossible to say with any certainty what kind of investment would make more money The answer depends on the risk appetite as well as the preferences of each investor More importantly, at different times; investors will make different investment decisions

In a recent speech, Warrent Buffet tended to favor investing in index funds and praising passive investment He argues that active investment strategy costs too much and that return is not high

"Continuing to buy the cheap S & P 500 fund is something that I think is the most realistic at all times." he shared on CNBC However, if only choose a passive investment strategy that does not use active investment strategy, it is no different than gambling Passive investing is best suited to

Therefore, investors in the world always give priority to active investment funds in real The stock market is getting more volatile with a lot of ups and downs and investors are hoping to find

a “Black Swan event” that can beat the market In addition, many investors find that active investment is an attractive investment strategy in certain market segments where the market is ineffective, such as investing in stocks of small cap

Return to Warrent's speech and look at the reality, he became a billionaire when he beat the market with active investment rather than investing in indicators When he had the extra money after that, he put a few into the index funds to get a certain return every year

I would personally choose a passive investment strategy for bluechip stocks when the stock market is stabilizing But will divest capital into active investment when seeing signs of market abnormalities or other intangible political events that affect the market in general

7 References

1 Fama, E (1965) The behavior of stock market prices Journal of Business, 38(1), 34-105

Fama, E (1970) Efficient capital markets: A review of theory and empirical work

Journal of Finance, 25(2), 383-417

2 Fama, E., & French, K (2010) Luck vs skill in the cross section of mutual fund returns

Journal of Finance, 65(5), 1915-1947

3 Jensen, M.(1968) The performance of mutual funds in the period 1945-1964 Journal of

Finance, 23(2), 389-416

4 Asebedo, G., & Grable, J (2004) Predicting mutual fund performance over a nine-year

period, Journal of Financial Planning and Counseling, 15(1), 1-11.

5 Research, M M (December 2017) Passive Fund Providers Take an Active Approach to

Investment Stewardship

6 Le Chung Thanh Thao (2012), Efficient Market and Signaling Hypothesis on Vietnam

Securities Market 2009-2012”, Việt Nam: Hồ Chí Minh.

7 Nguyen Thi Bao Khuyen (2010), Stock prices and macroeconomic variables in  vietnam:

an empirical analysis, Vietnam - Netherlands project for m.a in developing economics.

8 Phan Khoa Cương (2013), Market efficiency in emerging stock markets: A case study of

the Vietnamese stock market.

9 Truong Dong Loc (2006), Testing the WeakForm Efficiency for the Vietnamese Stock

-Market, Netherlands Journal

10 VOICU, A passive vs active investment management strategies.

11 Carhart, M (1997) "On Persistence of Mutual Funds." The Journal of Finance, Vol.52,

No 1, 57-82

12 ANDREW ANG, W N G., STEPHEN M SCHAEFER 2010 The Efficient Market

Theory and Evidence : Implications for Active Investment Management [Online].

13 HIEN, D N D 2012 Investor psychology in the financial market in Vietnam.

14 MADISONFUND July 2, 2012 THE ADVANTAGES OF ACTIVE MANAGEMENT.

15 MAUBOUSSIN, A R A M J 2001 Does It Pay to Be active Investor?

16 MORNINGSTAR 2014 Active Passive Strategies.

17 RESEARCH, M M December 2017 Passive Fund Providers Take an Active Approach

to Investment Stewardship [Online] Morningstar

18 WHARTONSCHOOL, T Feb 02, 2011 If Index Funds Perform Better, Why Are

Actively Managed Funds More Popular? [Online] Available:

http://knowledge.wharton.upenn.edu/article/if-index-funds-perform-better-why-are-actively-managed-funds-more-popular/