Hermes weighs in on the active versus passive investment management debate and finds active strategies are cyclical
Active investment strategies may not always perform better than their passive counterparts, but they are probably still worth keeping, according to new research from Hermes Investment Management.
This is because the performance of active funds is cyclical, according to Hermes, and the value may be higher at times of “market inflection”.
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The active versus passive debate in investment management has been hotly debated, with some market players accusing active fund managers – who allocate capital to various asset classes and sectors in line with their own strategy rather than tracking an index – of charging investors more without really offering any added value.
But the Hermes report, authored by head of multi-asset Tommaso Mancuso, states that “we would not recommend making wholesale movements between [passive and more complex multi-asset strategies] as their cyclicality can make it challenging”.
“Instead, a more prudent strategy would be to maintain a balanced allocation to both passive and active approaches,” it states.
The report notes that at a general level more investors are choosing to switch from active to passive strategies. When releasing its asset management review earlier this year, the Financial Conduct Authority implied that active managers needed to do more to prove that their higher fees were justified.
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The study looks at funds from 1996 to 2017, for which Mancuso developed quantitative strategies for back-testing.
He divided the funds into “simple” strategies which only invested in a couple of asset classes, and “expanded universe” funds which were more complex.
Before and during the global financial crisis, Mancuso’s data suggested that passive simple portfolios on average returned less than their active multi-asset peers. But after the crisis, this has been reversed – a feature which may, Mancuso concluded, be attributable to quantitative easing.
“Since hitting a low point in 2013, the benefits associated with an expanded asset universe appear to be resurfacing,” he said.
“Should the normalisation of monetary policies continue, we would expect them to increase further. The value associated with active asset allocation appears to be highly cyclical. In short, active managers seem to have most scope to produce significant alpha during market inflection points.”
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