Rather than casting a definite judgement on which approach is best – active or passive, CoreData’s Passives Report tracks, identifies and explains the growth of the passive investment market in the UK, building on last year’s report.
Asset managers have faced many challenges since the 2008 financial crisis; some more than others.
A near seven-year bull market fueled by loose monetary policy and central bank market engineering has supported the cyclical support for many passive investments and left numerous active participants struggling to outperform and justify their higher alpha-chasing costs.
Add in economic uncertainty, new regulation triggering an overhaul of business models and the growing pressure to secure adequate returns for clients in a low-yield environment and it all combines to form a very strong head-wind facing some managers.
Delivering returns is of particular concern and central to the ongoing debate of whether active management can still be justified or should investors solely rely on a passive approach using indexed funds and exchange-traded funds (ETFs).
The active-passive debate has been raging for decades but remains topical. Academics, many being proponents of the efficient market hypothesis (EMH), have contended that passive investments are the logical choice for any investor. Given that markets are efficient when it comes to incorporating information into securities, it makes sense for investors to opt for a passive fund that will guarantee market returns.
Many asset managers, advisers and investors, advocating for active management disagree, claiming an active element is essential to exploit potential arbitrage opportunities and to weather bear market cycles – something passive managers may not be in a position to do.
This is one of the more simplistic arguments in the debate and in reality both investment philosophies can be appropriate for different investors at various points of the business cycle, across a variety of markets. Most practitioners accept that the two approaches are complimentary rather than mutually exclusive.
The mixed results of empirical research into the subject of active and passive management have added fuel to the debate. And this report seeks to add further to the conversation.
The study includes analysis of the continued growth of passive funds within the UK and the attitudes of advisers and investors, both retail and institutional, towards these products. And it also looks at the appeal of ETFs in continental Europe and the US.