CapitalatWork

It was in 1975 that “Vanguard”, under the leadership of the legendary John Bogle, launched its first index fund linked to the S&P 500. It subsequently grew to the biggest mutual fund in the United States. Since those early days, passive asset management has, for some good reasons, conquered the world investments. The Vanguard web-site still offers a wealth of information on passive investing.

http://www.vanguard.com

The reason why indexing works has to do with simple mathematics. As a group, investors earn the market’s return. For every investor that beats the market, another one will be beaten. On average, investors can earn no more than the market return – before costs. After costs, the average investor must lag the market. The higher the costs, the greater the shortfall. Costs do matter. Indexing succeeds by seeking to match the market’s return, while keeping cost low.

CapitalatWork’s answer: We fully recognize the even bigger importance of costs in asset management. This is why we strive towards 100% transparency with regards to costs:

• In our actively managed mutual-funds (bonds and equity) this means that the only cost charged to the client are the management fees. Transactions in our funds are executed at cost through state of the art execution programs. Our challenge is to strike a balance between the cost of our in-house research and the extra performance that research can offer. We believe that our investment philosophy creates a win-win situation for us and our clients.
• We have developed a family of low-cost mutual-funds (equity), that are passive in the sense that they are linked to indices, but active in their construction. It is our answer to passive investing. Fundamental indexing tries to give the best of both worlds to the investor: the low costs and broad diversification of passive management in combination with our in-house research

Two other points of argument that are debated in the active versus passive discussion are turnover and diversification. Some researchers argue that the extraordinary dynamics of the world economy will increase the turnover of index funds. This is because the composition of the indices changes more rapidly than before. This would increase the costs of running passive strategies. Others argue that indexes do not offer broad diversification. The overwhelming importance of financial stocks in today’s indices leaves investors vulnerable to a specific sector, just as it was the case with technology stocks at the end of the nineties. A great article on these topics was written by Peter Bernstein in the Financial Analysts Journal in 2003. The FAJ is the most famous publication of the CFA Institute. The FAJ is one of the favored journals for academics in investments to get their research published. Several of our analysts have obtained a CFA (Chartered Financial Analyst) designation.

http://www.cfainstitute.org/index.html

The debate between active and passive management will probably never end. Even stronger, there is no clear-cut answer. The world of asset-management is just not that simple. CapitalatWork therefore wants to offer both approaches to its clients. What makes us really unique is that we use the same valuation methodology for our active investment process as for our passive investment process. Our valuation methodology (Click here to read more about our valuation methodology) which is based on in-depth research of Enterprise Value and Free Cash Flow of the companies we invest in is used for all our investments:

• active and passive investments
• bond and equity investment