- When investing your money across changing market conditions, you might question how the passive funds you’re invested in are managed.
- To find out more about passive funds, we spoke to abrdn’s Justin Jones and Daniel Reynolds – co-managers of the MyFolio Index range.
- They share what goes on behind the scenes at abrdn – to help make sure funds remain in line with our customers’ needs.
Markets are certainly no stranger to ups and downs. One minute they’re thriving. And the next? An economic curveball rears its head and bam – they take an unexpected turn.
These are market cycles – a perfectly normal part of investing. But for anyone, unpredictable markets can be frustrating – no matter what type of fund you’re in.
A large part of the portfolio we recommended to you are passive funds. The sole aim of a passive investment fund is to track the performance of a market as closely as possible. This investment strategy is transparent, cost-effective and provides potential for market average returns over the medium to long-term.
There’s much more to passives than what you might think
To find out more, we spoke to Justin Jones and Daniel Reynolds – experts at leading global asset manager, abrdn. Together, they manage the hugely popular MyFolio Index funds – which have been created with our customers in mind.
abrdn’s team of experts make key asset allocation decisions – along with forecasting and careful planning. This is to make sure the funds remain in line with their original, long-term risk and reward objectives.
Daniel acknowledges that while each MyFolio fund is made up of passive investments, active decisions are still made when looking at areas to invest in (like regions and asset classes). He explains, “I’m a strong believer that – just because our funds mainly use passive underlying investments, it doesn’t mean they’re purely ‘passive’ funds.”
So, what goes on behind the scenes?
1. Reviewing underlying funds
Each MyFolio fund consists of a range of underlying passive funds – run by their own underlying managers.
To make sure the MyFolio funds stay in line with your needs, the team frequently review all the underlying funds. Justin adds, “As well as looking at their investment returns, we aim to make sure their 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 investments as much as possible – in line with your feelings towards risk and reward.
As long-term asset allocation is a key focus for the MyFolio range, Daniel states, “The structure and asset class allocation are the most important tasks we do.
“We review this at least twice a year – with the strategic asset allocations usually being refreshed every 12 months. This involves consideration of new asset classes – as well as likely drivers of returns over the next 10 years. Being a maths geek, I very much 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 MyFolio Index funds
The MyFolio range of funds suit different appetites to risk. Using a consistent and detailed process, abrdn’s team assess these funds every quarter – to check if the fund is still within its agreed level of risk.
If necessary, they’ll make changes – to help funds achieve a return in line with their risk approach. Justin clarifies, “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 customers’ needs. It's the key part of our investment process that we've consistently applied across the MyFolio range of funds 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 definitely seen a shift in views towards passive investing,” Daniel acknowledges. “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
As well as being experts on passive investing, both Justin and Daniel know a thing or two about investing during tricky times. So whilst we still had them, we thought we’d use the opportunity to get some of their top tips on investing during volatile times.
Having been in the industry for a long time, Justin has helped investors through incredibly tough market periods. “The Global Financial Crisis was by far the most volatile backdrop for investors that I’ve witnessed in over 22 years of managing customers’ money,” he admits.
“From this period – as well as more recent events – I’d say I’ve learnt a few very important 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.
“But 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 help reap the best, long-term rewards.”
Daniel agrees, “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.”
A return to normality?
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 to balance out returns in the process. Yet over much of 2022, both risky and cautious asset classes failed to deliver and fell in unison.