Active and Passive’s Place in a Diversified Portfolio

by:
Strategic Asset Allocation & Solutions Group, New York Life Investment Management

Industry Changes Require Evolved Solutions

Fundamental changes in the financial industry and the current regulatory environment will drive a greater focus toward lower-cost, more tax-efficient products.

Investors are seeking low-cost beta exposure at the expense of actively managed investment solutions. Even though understandable, it’s important to note that both active and passive strategies have a place in a diversified portfolio. In the chart below, a higher percentage of active managers has outperformed their respective benchmarks in such asset classes as municipal bonds, intermediate- and short-term bonds, and international equities. Therefore, we believe investors may want to consider using their fee budget to hire active managers where they have the ability to outperform.

Manager Performance in Key Asset Classes Helps to Identify Active and Passive Opportunities1

Five-Year Annualized Return Period Ending 12/31/16

Smart beta resides at the intersection between active and passive management. These strategies tend to keep fees low, while offering the possibility of competitive risk-adjusted returns.

“Smart Beta” ETFs Are Attractive to Investors, as They Blur the Line between Passive and Active2

U.S. Smart Beta ETF Growth

When an asset class is difficult to replicate or inefficient, much like in the municipal bond market which has many moving parts, an active investment strategy can make sense. Investors may want to consider low-cost, tax-efficient solutions through smart beta investments and
municipal bonds, if suitable.

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1. Sources: Morningstar, New York Life Investments, 12/31/16. Each asset class listed is represented by its respective Morningstar category. Past performance is no guarantee of future results, which will vary.1. Sources: Morningstar, New York Life Investments, 12/31/16. Each asset class listed is represented by its respective Morningstar category. Past performance is no guarantee of future results, which will vary.

2. Source: Ignites Distribution Research. Report: The Opportunity in Smart-Beta ETFs, August 2016. Smart beta is defined at the end of this seminar.

All investments are subject to market risk, including possible loss of principal. Diversification cannot assure a profit or protect against a loss in a declining market.

The information and opinions contained herein are for general information use only. MainStay Investments does not guarantee their accuracy or completeness, nor does MainStay Investments assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. There can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Past performance is no guarantee of future results.

Active Investing is an investment strategy involving ongoing buying and selling actions by the investor. Active investors purchase investments and continuously monitor their activity in order to exploit profitable conditions. Active management typically charges higher fees.

Beta is a measure of the volatility, or systematic risk, of a security or a portfolio, in comparison to the market as a whole.

Passive Investing is an investment strategy that aims to maximize returns over the long run by keeping buying and selling to a minimum. The idea is to avoid fees and the drag on performance that frequent trading can potentially cause.

Smart Beta defines a set of investment strategies that emphasize the use of alternative index construction rules to traditional market capitalization-based indices.

For more information about MainStay Funds®, call 800-MAINSTAY (624-6782) for a prospectus or summary prospectus. Investors are asked to consider the investment objectives, risks, and charges and expenses of the investment carefully before investing. The prospectus or summary prospectus contains this and other information about the investment company. Please read the prospectus or summary prospectus carefully before investing.

MainStay Investments® is a registered service mark and name under which New York Life Investment Management LLC does business. MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. Securities distributed by NYLIFE Distributors LLC, 30 Hudson Street, Jersey City, NJ 07302. IndexIQ® is an indirect wholly owned subsidiary of New York Life Investment Management Holdings LLC. ALPS Distributors, Inc. (ALPS) is the principal underwriter of the ETFs. NYLIFE Distributors LLC is a distributor of the ETFs. ALPS Distributors, Inc. is not affiliated with NYLIFE Distributors LLC. NYLIFE Distributors LLC is a Member FINRA/SIPC.

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SAS Group

Strategic Asset Allocation & Solutions Group, New York Life Investment Management

NYLIM’s Strategic Asset Allocation & Solutions (SAS) Group invests tactically across the full span of global capital markets, designing comprehensive solutions for a variety of client needs. Managed assets include MainStay Asset Allocation and Retirement Funds, mandates for third parties, and a customized strategy for the New York Life General Account.

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