The growth of passive investing may actually be a positive for active management and should be viewed more as an opportunity than a threat.
Marlene Hassine Konqui, Head of ETF Research at Lyxor Asset Management
That’s the conclusion of the Lyxor Dauphine Research Academy, a joint initiative between Lyxor Asset Management and the University Paris-Dauphine House of Finance, which recently investigated the relationship between passive and active management, looking at what role the growing passive space has left for active managers.
Their research identified evidence that the introduction of passive funds has helped investors by increasing competition in asset management. Specifically, the increasing availability of smart beta funds is forcing active managers to demonstrate that they can deliver true alpha in order to continue to gather flows.
The research also found evidence that, at some point, the increasing use of passive funds could create extra opportunities for active managers. This could then potentially help active managers to improve their performance and, in turn, to increase the fund flows they attract.
Overall, in combination, the research suggest that a point of equilibrium will be reached on the asset management market between the share held by passive investment and that held by active investment.
Commenting on the research findings, Marlene Hassine Konqui, Head of ETF Research at Lyxor Asset Management, said: “There’s no doubt that passive asset management has enjoyed huge growth in the last decade. Yet, Passive funds still represent a small part of the asset management industry. But their usage is making investors more sensitive to complex measures of active management skill.
“So, while ETFs are helping generate a more competitive asset management marketplace, they will not replace the best-performing active managers. Therefore, both management styles will take a distinct share in the market as they both have a role to play in investors’ portfolio construction”.
Benjamin Bruder, Head of Quantitative Research at Lyxor Asset Management, added: “We have long held the view that a combination of active and passive management helps to deliver optimal portfolio performance, and the findings of the papers sponsored by the Lyxor Dauphine Research Academy would further support this view. To that end, the idea of active versus passive management is something of a misnomer, as exposure to both can bring added value to portfolios”.