Thought Piece: Passive or Active, Global or Thematic?


Different ways of investing. Each has their merits and their disciples but the reality is that none of the them are separated by clear demarcation lines.

Passive or Active, Global or Thematic?

Different ways of investing, primarily but not exclusively, in equities. Each has their merits and their disciples but the reality is that none of the them are separated by clear demarcation lines.

Passive or Active

Of course, it’s open to debate but the best way to save money is to do it frequently, monthly perhaps and review your savings once a year. Whether you invest in an index-related ‘passive’ product at a low-cost or in a more expensive, ‘active’ solution is less important than saving itself.

Choosing the ‘passive’ path may mean little to the retail investor. Cost may be an influence but the reality is that even in an index product, there will be some rebalancing within the index and thus, an active element. For those that have been offered or chosen a suite of index products to deliver a global equity solution or as part of a multi-asset solution, there will be a regular re-balancing of their portfolio, again – another active element.

For those who see themselves as good asset allocators, they may wish to populate their allocations with passive, active or a blend of both to maximise their chosen regional or thematic exposure. Genuine alpha generation from an active manager that repeatedly beats an index is a useful additive to a cost conscious portfolio construction.

The T. Bailey Funds’ exposure to Japanese equities represents an excellent example of how to address the title of this thought piece.

Japan might look like a geographic allocation but is part of a reform theme that once included India i.e. in Japan’s case, the catalyst for market upside is the momentum created by corporate governance reform in Japan, improving returns to shareholders. Japan remains one of the Funds’ largest allocations and is manifested in the funds’ portfolios by a mix of ‘passive’ and ‘active’ funds:

Amundi Prime Japan UCITS ETF – The objective of this Sub-Fund is to track the performance of Solactive GBS Japan Large & Mid Cap Index.

JK Japan – A specialist manager based in Guildford, Surrey but run by a manager who was based in Japan for eight years.

Since combining the two six months ago, they have returned 15.2 % and 17.5% respectively net of fees to end-March 2024.

Nvidia – thematic or geographic? Does it matter? Probably not but it is easier to identify its strengths by comparing it to its thematic peers. Passively, investors may end up with a large single stock position in Nvidia and the US given both of their performances in recent times. The US now represents 71% of the MSCI World Index so an investor’s passive global return will be heavily skewed by US equity performance.



Consider that the top ten constituents (all US) represent 22% of the MSCI World and your global passive exposure is both dependent on one country, admittedly the world’s largest economy, and a few stocks – the top five contribute over 15% of the MSCI World. Diminished diversification is only potentially rescued by UCITS rules.

Consider the same index from a sector basis below:


And you have a better picture of underlying themes albeit with the same stock concentration. But you might want to focus on fewer themes where the longer-term demand dynamics overshadow their supply. Healthcare, Cybersecurity, Artificial Intelligence (AI) and Energy Transition might be your preferred themes. They might overlap. AI might be prevalent across other themes like healthcare. It is possible to reflect energy transition via a position in copper in a thematic multi-asset or global portfolio.

Consider Schneider Electric, a company listed on the French bourse. Its customers are worldwide yet it is one of the world’s leader of electricity facilities and electricity is in huge demand thanks to the demand for massive data centres which require a lot of electricity (and water) due to AI among other things. Similarly, Novo Nordisk, a Danish company, has been at the forefront of the obesity drug development that reduces food cravings. Eli Lilly, a US company, is another.
So, logically to us at least, themes are more relevant than geography.

Both feature in the top ten of the Global Titans Index. Finally, I’ll leave you with this graphic sourced from Morningstar. Would you be an active investor or a passive investor – or perhaps a blend of both? Active versus passive is a longstanding debate. Recent history tends to blur the thinking, the cycles are quite long but active may be due a resurgence.


Fund of Funds?

One of the outcomes of this debate is why use a fund of funds? Using the Japan example from earlier, the combination of a cheap index provider alongside a boutique active manager whose goal is to generate above-market returns, is a good reason. Large asset managers seek to gather assets by attempting to beat the market. Many fail due to their size – too big. For large publicly-quoted asset managers, the aim is to manage as much money as possible and charge a fee for doing so. Their first goal is generally to reward shareholders before investors. As a fund of funds, our aim is to invest with managers who are not too big but beat the market by investing in what they want to own, not the whole market. At the end of the day, we will be judged on what we deliver net of fees but if we get it wrong, it is more likely due to our asset allocation, not manager selection and their fees.

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