Lee Dunn, Client Director and Head of Investments at Bristol-based Paradigm Norton, believes passive investing works better than active in all markets.
While the conventional wisdom is that in certain efficient markets like the US, passive works better than active, Dunn said the key in all markets was ‘keeping costs low’. He said emerging markets, which are considered less efficient, were much more costly for active managers to trade in. While acknowledging that some active managers perform well, Dunn said that, with all the costs they were adding, passive investment tended to outperform.
Paradigm Norton’s investment strategy has evolved away from active strategies. ‘We have passive exposure pretty much across the board,’ he said.
Socially responsible investing (SRI) was the remaining area in which the firm has historically had to invest actively, for lack of passive options. ‘The primary objective of any investor is usually to maximise risk-adjusted returns,’ said Dunn, but clients investing according to SRI are usually obliged to forgo higher expected returns from asset classes such as emerging markets and smaller companies. By not including ‘sin sectors, such as energy and resources’, their portfolios became more concentrated in other sectors, reducing diversification and increasing the overall risk of the portfolio, he believes.
However, this has changed since the launch of the Vanguard SRI funds and the Dimensional Fund Advisors (DFA) Global Sustainability Core Equity fund. Dunn works closely with Steve Williams, a Chartered Financial Planner at Paradigm Norton, in analysing the funds.