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Active vs Passive - The Great Debate

Will the pendulum swing back to active investing?

Passive equity strategies have seen huge inflows in recent years. Will this create distortions that active managers can take advantage of? The papers below explore how active vs passive returns are impacted by market conditions and examine how returns are impacted by the higher fees charged by active managers.

When considering the active vs passive debate, it is impossible to ignore the widespread adoption of factor investing - a number of the papers below cover this topic.

Savvy Investor

From Beta to Alpha: Why it will pay to be the last active investor standing (AB)
(For compliance reasons, this paper is only accessible in North and South America) 
Alliance Bernstein argues that, despite the amount of inflows into passive equity strategies over the past decade, the pendulum may be swinging back in favor of active management.

Degrees of Difficulty: Indications of Active Success (S&P Dow Jones, May 2018)
The paper explores the SPIVA database to ask if we can associate the variations in active manager performance with identifiable regime characteristics.  It finds that active management is likely to be particularly challenging when dispersion is low, the market rises, market leadership derives from megacap stocks, and low volatility outperforms. 

The Impact of Market Conditions on Active Equity Management (PGIM, 2018)
(For compliance reasons, this paper is only accessible in the United States)
Stronger markets and low volatility have put active equity managers under pressure. PGIM shows that this fits with the pattern of counter-cyclical excess returns for managers versus the equity market.

How Much Do Fees Affect the Active vs Passive Debate? (S&P Dow Jones Indices)
This report looks at how fees impact mutual fund performance and institutional managed accounts performance for both equity and fixed income, utilising both gross and net-of-fees returns.

Active Strategies, Indexing and the Rise of ETFs (Greenwich Associates)
(For compliance reasons, this paper is only accessible in the United States)
The rise of ETFs has meant that the lines between active and passive/indexed investment approaches are becoming blurred as institutional investors increase their usage of ETFs within their portfolios.

How the Active vs. Passive Debate Misses the Point (Swan Global Investments)
Swan Global Investments believes that the difference between active and passive investment management doesn't matter nearly as much as the fact that both approaches are heavily exposed to systematic risk.

Transition Management Explained (Russell Investments, 2017)
(For compliance reasons, this paper is only accessible in the EMEA region)
For investors thinking of switching from active to passive (or vice versa) executing the change can be costly. Russell Investments explains how transition management can be used to contain the costs.

Actively Benefiting from Emerging-Market Small Caps (Franklin Templeton, 2018)
(For compliance reasons, this paper is only accessible in the EMEA region)
Franklin Templeton discusses emerging-market small cap equities, and how certain misconceptions about them may be unnecessarily deterring active managers.

Enhance your skill: how active managers are using factor strategies (BlackRock)
(For compliance reasons, this paper is only accessible in the United States)
Many active managers are adding factors to their existing investment process. BlackRock investigates this trend through the lens of 3 case studies.

Does Past Performance Matter? (S&P Dow Jones Indices, Jan 2018)
S&P Dow Jones Indices presents a scorecard for persistence on the part of fund managers in order to determine to what extent past performance may or may not indicate future outcomes.

How Do Your Small Caps Really Create Value? (Intech, 2018)
(For compliance reasons, this paper is only accessible in certain geographies)
Intech provides support for the claim that the size effect, a long-held accepted truth in investing, is actually due to portfolio-level effects and not because small stocks simply outperform their large-cap counterparts.

Sharpening the Arithmetic of Active Management (Financial Analysts Journal, 2018)
AQR Capital Management shows that not only does William Sharpe's previous statement not hold true in the real world, but both active and passive investing strategies can play a useful economic role.

BlackRock’s 2018 Guide to ETFs and Derivatives
(For compliance reasons, this paper is only accessible in the United States)
ETFs and derivatives provide simple, low cost ways of replicating index performance. BlackRock's Guide unwraps some of the details.

Complete Guide to Smart Beta: Beyond Active and Passive (SSGA, 2018)
State Street Global Advisors looks at each of the 5 most broadly accepted factors and the benefits that they could potentially have for investors, as well as how to implement these strategies and why some are more popular than others.

Smart beta: 2018 global survey findings from asset owners (FTSE Russell)
This FTSE Russell smart beta survey looks at trends in awareness and usage of smart beta strategies by asset owners.

Hallmarks of Successful Active Equity Managers (Cambridge Associates, 2015)
How can one tell when the passive investment market is becoming overcrowded? Cambridge Associates looks at how structural biases can help to frame expectations for both active and passive investors.

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