abrdn: Investing in passive funds over the long term

Ups and downs are inescapable in investing. One minute, markets are thriving. Next minute, an economic curveball appears, and - bam - markets take an unexpected turn for the worse.

While market cycles are normal, unpredictability can be frustrating, no matter what type of fund you’re invested in.

There’s more to managing passives than you might think

Our team of experts make key asset allocation decisions – along with forecasting and careful planning. This is to make sure our multi-manager funds remain in line with their original, long-term risk and reward objectives.

While each fund is made up of passive investments, active decisions are still made when looking at areas to invest in (like regions and asset classes). So, what’s our process?

1. Reviewing underlying funds 

Each multi-manager fund consists of a range of underlying passive funds – run by their own underlying managers.

To make sure our funds stay in line with client needs, we frequently review all the underlying funds. As well as looking at investment returns, we also aim to make sure costs are competitive.

2. Keeping invested in the key areas  

We believe that one of the best ways to invest long-term is through careful asset allocation. In other words, investing in a broad range of asset classes – like shares, bonds, property and cash. This is to diversify your client’s investments as much as possible – in line with their feelings towards risk and reward.

As long-term asset allocation is a key focus for our range, the structure and asset class allocation are the most important tasks.

We review this at least twice a year – with the strategic asset allocations usually refreshed every 12 months. This involves consideration of new asset classes – as well as likely drivers of returns over the next 10 years. As maths geeks, we enjoy understanding what drives portfolio returns - as well as what can be done to exploit new opportunities from ever-changing markets.

3. Regularly reviewing the funds 

Our range of funds suits different risk appetites. Using a consistent and detailed process, we assess these funds every quarter to check they're still within their agreed levels of risk.

If necessary, we make changes to help funds achieve a return in line with their risk approach. As managers, our primary job is to ensure funds are adjusted to meet the different levels of risk. And that the level of volatility in each fund, aligns with our clients’ needs. It’s a key part of our investment process that we’ve consistently applied while working for abrdn over the past 14 years.

A popular way to invest

It’s been an ongoing debate for some time: which is better for long-term investing – active or passive?

Of course, both have their own pros and cons – and ultimately, it depends on each person’s unique situation. But overall, passive funds are becoming more popular than ever right now.

Over the years, we’ve seen a shift in views towards passive investing. Given low interest rates – and key economic events – this has led to a tougher time for actively managed funds.

Because of this – and the fact that investors are becoming more cost conscious – we’ve seen a growing appeal of passive funds for some time.

Words of wisdom in volatile times

Having been in the industry for a long time, the team has helped investors through incredibly tough market periods. The Global Financial Crisis was by far the most volatile backdrop for investors.

This period and more recent events have provided valuable lessons. Markets can be turbulent – and there can be painful short-term shocks. So behaviourally, it’s very easy to react too quickly – in turn, making careless, short-term decisions based on noise and uncertainty. 

The key is to get expert advice and stick to your investment plan. As the old saying goes, it’s time in the market – not timing markets – that helps reap the best, long-term rewards.

Particularly during times like last year, it’s easy to move investments around unnecessarily, based on a small amount of information. The reason we run funds the way we do is to deliver long-term returns, in line with specific risk tolerances.

Providing you’re comfortable with the level of risk you’re taking, trust that the process should deliver commensurate returns over time.

What can we expect from markets?

With so much volatility over the past few years, it’s been nice to see a positive shift in markets recently.

Usually, when shares struggle, bonds and other defensive assets tend to flourish – helping balance out returns in the process. Yet over much of 2022, both risky and cautious asset classes failed to deliver and fell in unison.

Recently, we’ve been pleased to see a return to more normal markets – if there is such a thing. However, given the recent rise of inflation – and rising interest rates – it’s been surprising how well markets have performed so far this year.

Final thoughts

We always remind ourselves of the tremendous privilege of being responsible for our clients’ money. It’s a hard job at times – but incredibly satisfying.