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Russell identifies five reasons for alternative to passive approach

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Russell Investments has identified five reasons why an investor may seek an alternative to a passive approach.

Research by the firm aims to broaden the debate over active versus passive investing beyond a focus on the average performance of active equity managers.

The research addresses the perennial investor question of whether to employ an active or passive investment approach and outlines five points for investors to consider.

These include the availability and suitability of passive options as well as whether active management can be expected to outperform a given index.

Don Ezra (pictured), Russell’s co-chairman of global consulting and recently named chairman of the Russell Global Knowledge Management Group, partnered with Geoff Warren, senior lecturer at the Australian National University, on the research.

"We take issue with the conduct of the active versus passive debate which has made the mistake of framing the issue exclusively in terms of whether active management can outperform an index,” says Ezra. “Ultimately the question of whether to choose some alternative to passive investing should not be approached as a single, all-encompassing decision. The choice is likely to vary across asset classes, investors and even time."

The new research highlights how the availability of a suitable index can play a role in the decision. The authors explain how a replicable index does not even exist for some types of investments, such as most unlisted assets. In other circumstances, an investor may prefer not to hold the index, either because it is at odds with their objectives, or they consider it inefficiently constructed.

The report also suggests that a preference for an active investment approach could arise under a range of conditions and that some investment environments may favor active management. These include situations in which active investment managers can benefit from an information advantage, access to desirable assets, capacity to add value to the underlying asset itself, or opportunities stemming from investor differences.

Furthermore, the report points out that the ability to identify skilled managers can provide a reason in its own right to pursue an active approach.

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