Active or passive? It’s not a binary choice

Investors shouldn’t concentrate too much on the question whether to go for an active or a passive solution, argued Kari Vatanen, head of cross assets and allocation, Varma Mutual Pensions at Expert Investor’s autumn roundtable discussion in Helsinki. “Active and passive is a continuum from market-cap weighted indices to really active long/short hedge funds,” he…

Active strategies overshadow passive for European investors

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PA Europe

Passive investing had the edge in 2016, but active managers have regained ground this year.

Schofield made the point that although last year was excellent for passive management, and this year has been good for active management, the underlying fundamentals have not changed much.

He went on to say: “The pendulum had swung too far back in favour of passive management, especially in large-cap developed equities. There are abundant amounts of relatively low-hanging, low-risk alpha that can be systematically harvested on a large scale, and will make a bigger difference to the overall pension fund return than smaller allocations to more exotic alpha sources.”

Although Lustig said passive had the merits of low fees, straightforward governance and easy market exposure, he also saw problems with it: “The passive industry follows market-cap indices. So, the investor puts more and more money into a bubble before it explodes. In credit indices, it’s even worse – investors have the highest exposure to companies with the highest gearing. With a market crash, passive investors might suffer most.”

However, in a low-yield environment, the demand for passive investing is unlikely to go away and Vatanen made the case for a blended approach: “Active and passive is not a switch-on, switch-off, binary solution. Rather, it is a continuum from market-cap weighted indices to really active long/short hedge funds. You have to find the right combination.”

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