Fonditel CIO's Aguado on the coexistence of active and passive investing

Eugenia Jiménez
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Fonditel CIO's Aguado on the coexistence of active and passive investing

The debate between active and passive Investing tend to loom in times of equity market volatility as we have seen in 2018.

However, investors are increasingly moving away from that debate that has traditionally counterposed both terms since, any investment decision is an active decision.

Fernando Aguado, Spain’s Fonditel CIO says: “I do not really like this terminology. Both the management of a multi asset product can be actively managed through passive products, but could also be managed passively using active products. So both methodologies are valid and make sense with diversified portfolios. This is the reason why we prefer to talk about active and passive products.”

In 2011, passive products accounted for a 14% of the market globally, a percentage that now has increased to 26/27% and that is expected to keep growing to around 31% by 2020.

Generally speaking the use of one or the other depends on the market efficiency in which we are Investing.

According to Aguado, the more efficient the market is, the harder it will become to obtain alpha with consistency, which might encourage investors to buy passive products.

“However, it might be worth to acquire active products in those markets that are less efficient , even though they might present higher fees,” Aguado says.

According to him, these are some of the reasons that explain the ongoing success of passive strategies:

Technology

Technology has possibly been the main reason behind this rise during the past few years. From the point of view of the producto, it has become fast, safe and reliable. From an automatisation’s angle, passive strategies have led to a lowering of the prices, and from a marketing perspective, they have boosted the distribution of products in the retail network.

The risk management evolution

When buying active products, an inherent risk is also acquired against a benchmark, against the investment goal. This is an unavoidable risk for fund buyers. Currently, we prepare very detailed risk budgets, and with the aim of maximising profitability linked to the risk we take, we have been decreasing that extra risk little by little while increasing the risk budget in the asset allocation.

Active strategies that are not really so…

There are so many active products that despite being compared with generic indexes, have clear management biases (sectorials, size, investment style, etc). Although this is not necessarily negative, they cannot be compared to generic indexes from a risk management point of view.

Resilience and innovation

In this evolution, technology remains a key element since it is making easier the distinction of biases/factors of an index or fund, which might end bringing a competitive advantage to the world of sistematic passive investment.

This has also led to the launch of many products – some whose fundamentals may just respond to fleeting trends – increasing the need to build portfolios with a clear investment philosophy while distinguishing between diversification and inclusion.

To conclude, I would not focus on the debate between active and passive products. Both have advantages and disadvantages, so the focus should be in the use we make of them, they way they are combined in portfolios and the way they are managed, Aguado states.

Eugenia Jiménez
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Eugenia Jiménez

Eugenia Jiménez speaks Spanish and is Iberia Correspondent for Investment Europe covering Spain & Portugal, as well as Italy.

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