Is there a trend towards passive management?
The trend is on, and it is structural. Surely the lack of clear and consistent average outperformance, the overall expensiveness, and the tendency of some “benchmark huggers” active managers helped this movement. But there is more: passive management should be seen as a new technology, not just as another additional financial product. As in other fields, you cannot challenge a new disruptive technology, you need to adapt and exploit it for what can be useful.
Nevertheless, I would not call the death of active investments: the last few years of financial markets environment, with central banks opening the floodgates of liquidity, have been a great global advertisement for passive investing. Plenty of liquidity meant a prolonged decrease in volatility, high correlation between asset classes, even higher correlations within them, down to the single stocks level. Basically the worst of all worlds for active managers and fundamentally driven investment processes, and an easy win for passives and purely beta strategies.
But it now clear that monetary policy is changing and starting to diverge globally, correlations will be lower going on and this will mean more dispersion of returns, more idiosyncratic risks, and opportunities of over performance for active managers. We are already increasing the active managed allocation of our portfolios to take profit of this new opportunities that will inevitably rise, with a focus con high conviction strategies. In the upcoming market environment there will be no place for “benchmark huggers” and “expensive low tracking error active” managers, but sitting on a pile of passives will be dangerous as well.
Name: Giuseppe Patara
Title: Portfolio Manager, director and fund selector
Company: Credit Suisse
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