Is All Passive Investing The Same?

Hanlon ES-AM Thumbnail

Passive investing has become all the rage as hundreds of billions of dollars flow from lagging active managers to passively invested ETF/Mutual Fund index-linked products. We can see from the graph below that the flow into passive investments is remarkable.Some of our age’s greatest investors have echoed the benefits of passive investing. Jack Bogle built the multi-trillion-dollar investment firm Vanguard upon the tenet of low cost index investing. Even the sage of Omaha, Warren Buffet, has said that if he passed away his wife should invest 90% in the S&P 500 and the remaining 10% in US government short-term fixed income.ES_passive_graph

But here is an important investing question, “Is All Passive Investing the Same?”. The answer…..No.

The “Buffet” 90% S&P 500 / 10% US T-Bill portfolio doesn’t give an investor a globally diversified portfolio with exposure to investments beyond US shores. Investing isn’t confined to the just the US, it encompasses developed international countries as well as the emerging countries of the world where a globally diversified portfolio can shine. Outperformance of various Asset Classes ebbs and flows, and timing it can be very tricky, so a globally diversified portfolio can participate in many Asset Classes. Year-to-date, May 31st, emerging markets (MSCI Emerging Markets Index) and developed international markets (MSCI EAFE index) are outperforming US markets (S&P 500 Index). Why shouldn’t your portfolio have some exposure to those international markets? Why not put it all into international? Well, there are times US equities will outperform international equities, another reason to diversify. Also, there are times when bonds will outperform equities, which is why a well-diversified portfolio isn’t exclusively invested in equities.

In addition to being globally diversified, investors of different ages and risk tolerances require different mixes of assets. A 65-year old nearing retirement wouldn’t necessarily be 90% in equities and 10% fixed income, like the Buffet suggestion. A more conservative portfolio might be more appropriate with a higher level of fixed income, as well as adding in some Tactical and Alternative “active” investments to provide for an even more diversified portfolio. Rather than counting only on the fixed income portion to provide the ballast & stability in the portfolio, the Tactical and Alternative “strategies” help diversify the fixed income Asset Class, especially in this low interest rate environment.

So, “No”, not all passive investing (i.e. US only) is the same. While Warren Buffet’s advice is an excellent start, a much better globally diversified portfolio is available. Hanlon has created five risk appropriate asset mixes, derived using Hanlon’s Essential Portfolio Theory (EPT), called the Hanlon All-Weather Models. This is an advancement upon modern portfolio theory helping to meet the needs of all investors. It gives them access to the best of the passive investing world, as well as some necessary exposure to active investments in the Tactical and Alternative areas. We can see a sample of these five world-class globally diversified models below.

Why not enhance passive investing with the Hanlon All-Weather Models and gain access to a truly globally diversified portfolio today?

ES_passive_charts


The S&P 500 TR USD index is an unmanaged index US large-cap stocks. The MSCI EAFE index tracks foreign stocks from the perspective of a North American investor. It includes a selection of stocks from 21 developed markets, but excludes the US and Canada. The MSCI Emerging Markets index measures the equity market performance in global emerging markets. Indices are unmanaged and cannot be invested in directly. Asset Classes are unmanaged.

Past performance is not a guarantee of future results. This Market Commentary is limited to the dissemination of general information pertaining to its investment advisory services and is not suitable for everyone. The information contained herein should not be construed as personalized investment advice. There is no guarantee that the views and opinions expressed in this newsletter will come to pass. Investing in the stock and bond markets involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice. Hanlon has experienced periods of underperformance in the past and may also in the future. The returns represented herein are total return inclusive of reinvesting all interest and dividends. Hanlon Investment Management (“Hanlon”) is an SEC registered investment adviser with its principal place of business in the State of New Jersey. Hanlon and its representatives are in compliance with the current registration and notice filing requirement imposed upon registered investment advisers by those states in which Hanlon maintains clients. Hanlon may only transact business in those states in which it is notice filed, or qualifies for an exemption or exclusion from notice filing requirements. Any subsequent, direct communication by Hanlon with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of Hanlon, please contact Hanlon or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). For additional information about Hanlon, including fees and services, send for our disclosure statement as set forth on Form ADV from Hanlon using the contact information herein. Please read the disclosure statement carefully before you invest or send money. Not all Hanlon clients are in the strategies discussed herein.