Unlocking the true potential of passives

As the active vs passives debate continues, the concerns of MFDs/RIAs to generate decent revenues from passives also persists. To address these concerns and help you identify the true business potential of passives, Cafemutual hosted Anubhav Srivastava, Fund Manager and ETF Specialist, Infinity Alternatives at Cafemutual Passives Conference 2023 (CPC 23) who spoke about unlocking the power of passives.

Citing ETFs as best suited for an all-weather portfolio, Anubhav said that the expense pass-through to you and your clients is better. Thus in this era of reducing revenue due to regulatory changes, you can create a stable long term revenue stream for yourself.  

He further stated that portfolio construction should begin using ETFs and then you can start adding alpha strategies to your clients’ portfolios. 

Additionally, Anubhav spoke about core and satellite approaches in the light of passives. 

Core approach 

Core portfolios usually contain indices, bonds, commodities and money market instruments and can help in developing long term, sustainable and remunerative portfolios. They are risk parity portfolios where through the use of passives, the risks at the individual constituent level remain constant across ETFs. Mixing ETFs like Nifty, Nasdaq, Gold, Liquid Bees, etc. creates ETF blends that reduce your stress of constantly picking winners and can generate minor alpha over headline indices.  

Additionally, it provides better portfolio diversification - for instance blending Nifty and mid cap ETFs gives a larger exposure across sectors. Interestingly, you can also use these for providing better post-tax returns through tax loss harvesting. 

Satellite approach

This is the alpha-generating part of the portfolio and typically comprises mid caps, foreign equities, etc. While a more prevalent view suggests that you should have the right beta which gives exposure to broad markets, through a satellite approach you can adopt more focused and disciplined alpha strategies. 

Further, you can add tactical tilts to take advantage of short-term opportunities, make it more interesting for clients and give a kick to their portfolios. It offers short-term exposure to various sectors and themes like banking, pharma, IT, etc. 

Such allocations should be towards alpha generation and volatility reduction while being complementary to the core portfolios. A negative correlation could wipe out the returns generated in the core portfolio and vice versa. 

The above story summarises the key points that Anubhav shared. You can watch the entire session by viewing the below video.