Active vs Passive? Your Guide to Retirement Investing
Summary
Enjoying a well-deserved retirement with a generous savings reserve is considered a life goal by many workers. The dream is not unattainable, but it requires a proactive mindset in managing your retirement portfolio.
Key takeaways
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With personal finance, some people are more active than others. In fact, the split between active and passive retirement strategies is something for investors to consider. An active strategy is implemented by fund managers proactively selecting investments in order to outperform the broader market in the long run. Passive strategies include investing in index funds or ETFs that track the broader market, ultimately mimicking the market’s performance.
Global equity indices do not capture China’s value
Traditionally, most retirement funds belong to the active management camp while some passive index trackers are being included in the relevant schemes as well. Either lacking a strong view of the market or time to monitor the portfolios, passive index funds are worth considering given their convenience. To be fair, both active and passive funds have their own merits. However, when it comes to China’s A-shares market, an actively managed approach may be more advantageous.
Investors are better off investing in actively-managed strategies, why? From a macro perspective, China is now one of the most influential economies in the world, accounting for 16.3% of global GDP, 12.4% of global consumption and 10.4%2 of global trade as of 2019. However, this rapid growth is not reflected in global or regional stock indices.
The total market value of the Chinese A-shares market amounts to US$13.4 trillion3 and just more than 20%1 of the global stock market turnover comes from A-shares, making it one of the most important stock markets in the world. With that said, the share of Chinese stocks in the MSCI All Country Index (MSCI ACWI) is only 5.2%1, and the share of A-shares in the MSCI ACWI is even lower than 1%1. That implies that the global or regional indices do not properly reflect China’s economic strength.
Passive trackers tend to miss out on the rising Stars
What about the China-focused index funds?
A-shares is a rich and diverse market with a wide range of industries. The variety extends to a group of fast-growing and dynamic small and medium-sized enterprises, particularly those engaging in technology, new energy and new infrastructure. However, stock indices are generally market-weighted. Passive investment in A-share indices often overlooks the future stars of China’s economy.
On the contrary, active management in the A-Shares market is believed to help capture companies that are expected to become the next big thing. Such investments would further unlock the long-term advantages of retirement investing.
1 Source: FactSet, MSCI, Goldman Sachs Global Investment Research, data as of 31 December 2020, unless stated otherwise.
2Source: FactSet, MSCI, Goldman Sachs Global Investment Research, data as of 2019.
3Source: Nasdaq, Shanghai Exchange, Shenzhen Exchange, Bloomberg, Allianz Global Investors, data as of June 30, 2021.
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Active is: Anticipating what’s ahead
2022 outlook
Summary
Be proactive and prepare for volatility in 2022 – and align with the long-term trends that could offer opportunities for investors.