(b) \"Active managers exposed as most US equity funds lag behind market\", Finan
ID: 2794281 • Letter: #
Question
(b) "Active managers exposed as most US equity funds lag behind market", Financial Times, September 23, 2016. In the above article, it stated that money has been draining out of actively managed funds and moving into index tracker funds at an accelerating pace in 2016. Critically appraise the arguments as to whether fund managers should therefore use purely passive investment strategies or whether investors should use, for example, a combination of active and passive strategies or “smart beta" strategies when constructing a portfolio (13 marks)Explanation / Answer
It depends on the investors risk taking capacity and willingness to take risk. If investor only want to take risk equivalent to market risk then investors should only use passive strategy to invest. This will give them market equivalent returns.
If investors is willing to take more risk in order to get extra return then investor can think of a combination of active and passive strategy. The passive component of portfolio will match the market risk and active component of portfolio will be the extra risk taken by investor to get extra return. The passive part will gauge against the lower return of active component.
If entire market collapse then even market return would not be good. Then both passive and active strategy would result in lower returns.
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