Should you actively invest? Directly, trading in your own investment portfolio? Or indirectly, utilizing a professional active asset manager, like a mutual fund manager? Or mix and match between active and passive investing, based on the specific market or asset?
All that and more in Episode 37 on the Wilson Wealth Management YouTube channel.
“Should I actively invest?”
Short answer, probably not.
In general, successfully picking individual securities on a consistent basis over the long term is not easy. We covered reasons why in “Episode 36: Passive versus Active Data” and “Passive versus Active Investing”.
However, there two areas where active management can outperform.
Ignored and/or inefficient markets. And niche markets or sectors.
“What do you mean by ignored or inefficient markets?”
Inefficient markets are those where security prices do not reflect all available information.
Perhaps a market with poor regulations and oversight. Maybe smaller markets that are not followed extensively by analysts and investors. “Over the Counter” (OTC) securities that are thinly traded. Or private companies, where there may be no market at all.
Market size may cause it be ignored. A mutual fund with $2 billion in assets may not be able to invest in certain markets or securities. For example, due to regulations like the “75-5-10” rule discussed below.
“And niche markets or sectors?”
Often, similar issues as with inefficient or ignored markets. With less attention and scope, niche areas may fall off the investment community’s radar. Less analysis and focus, more opportunity for pricing inefficiencies. And the chance for knowledgeable, active traders to profit.
The other aspect of niche sectors relates to the individual investor. If you have expertise in a business or sector, that may also create a competitive advantage to be exploited.
In my case, I have an oil and gas background, especially with junior companies in Western Canada. I may have a competitive advantage investing in these companies over someone who lacks that experience.
One of my fellow Board members on the CFA Society Saskatchewan holds a Masters in Cyber Security. His knowledge in this sector is extremely strong. I would not like to compete with him for the “best” investments in this niche.
When I worked at UBS, I was friendly with the team that advised clients on fine art holdings. An investment very common in trusts. Fine art is an extreme niche. Where the greater the expertise, the better the results. I would never want to value a rare painting. I would defer to the experts.
If you possess expertise in a niche, that may give you a competitive advantage in that area.
“What is the ’75-5-10′ rule?”
As mentioned above, rules and realities can make it difficult for larger investors to access certain niche or neglected markets. That may result in ignored sectors.
We close the episode by looking at actual investments. Vietnam based Dragon Capital? Indonesia’s Kinjer Pay. Saskatchewan’s Grow Solutions. Fidelity’s International Small-Cap Equity fund.
And see that even if large investors wish to invest in a niche area, it may not be feasible. Again, less competition may create positive opportunities for smaller investors.
If you plan to invest in inefficient, ignored, or niche markets, then active strategies may generate positive returns to benchmarks. However, it does take extra work in these markets. And there may be additional costs to research and trade in less efficient sectors. That may impact your overall performance.
If you wish to read more on this subject, please check out, “Active Investing, Right for You?”.
