By: Ryan P. Johnson, CFA, CFP® - DIRECTOR OF PORTFOLIO MANAGEMENT & RESEARCH
Our firm has been quoted in over 40 articles this year, including in U.S. News & World Report, Forbes, Yahoo! Finance, Business Insider, TheStreet.com, and more. Our website page https://mybuckingham.com/about/in-the-news is updated as new quotes occur. Below are some of our thoughts on active and passive investment management that we wrote in a recent response.
Passive management may traditionally be thought of as owning an exchange traded fund (ETF) that represents an index while active management may traditionally be thought of as picking individual stocks. However, active management is more than individual stock selection. Strategic decisions about asset allocation (mix of stocks, bonds, cash, and alternatives), international investments, and even weights towards large cap, mid cap, and small cap stocks indices are active decisions. Active management can also come into play in bonds, with strategic decisions about quality, issuer types, taxable or municipal, and average maturities. Lastly, for our clients who have alternative investment exposure, we utilize active mutual fund managers.
What is your investment strategy when combining active and passive?
We put the client first. Where we feel the client will be better served with active management, we use that. Otherwise, we diversify and supplement the portfolio with ETFs for diversification, low internal costs, and tax efficiency.
Why combine active and passive?
The core of many of our equity portfolios is individual stocks, where we feel our bottoms up analysis can enhance results over multi-year periods. There is not a one-size-fits-all market model. We break down the market into sectors and then into industry groups to have manageable pieces to evaluate. We have various approaches and goals for different industries. For example, what is good for the Energy industry is often bad for Restaurants. In the end, we bring the best ideas in each group together to create an actively managed portfolio.
Any reasons beyond the cap gains dilemma?
The cap gains dilemma is that active management may create more taxable gains than owning an ETF and never trading it. However, gains can be managed with tax projections before the end of the year hits. Depending on the client’s expected ordinary income over several years, we can time the recognition of gains from one year to the next or we can recognize gains up to a certain amount to take advantage of filling lower tax brackets.
Thoughts on the role of individual stocks?
If a client has a large, low basis holding, we can use individual stocks in other sectors to build a diversified portfolio around that position. As the client’s tax situation changes or as offsetting losses occur, we can trim the concentrated position over several years to further diversify the portfolio.
Using individual stocks can allow for more control for the timing of gains and losses than buying one index fund/ETF. We also have more control of where growth stocks, high dividend payers, bonds, etc. are placed in different account types like IRAs, Roth IRAs, and taxable accounts to further enhance the long-term tax advantages.
As we continue to grow, our focus remains on one family, business, or foundation at a time. We would love for you to send the link below to your friends and family, so that we may assist other successful business owners and individuals with their financial needs: https://mybuckingham.com/contact. We again thank you for your continued trust and support.
RISKS AND IMPORTANT CONSIDERATIONS
Views and opinions expressed here are for informational and educational purposes only and may change at any time based on market or other conditions or may not come to pass. This material is not a solicitation to buy or sell securities and should not be considered specific legal, investment, or tax advice. The information provided does not consider the objectives, financial situation, or needs of any specific individual. All investments carry a degree of risk and there is no certainty that an investment will provide positive performance over any stated period. Equity investments are subject to company specific and market risks. Equities may decline in response to adverse company news, industry developments, or economic data. Fixed income securities are subject to market, credit, and interest rate risks. As interest rates rise, bond prices may fall. Past performance is no guarantee of future results.