Investments: the active management – passive management match

Investments the active management passive management match

Doing better than the market by skilfully selecting portfolio securities: this is the mission of “active” management funds. Conversely, so-called passive management seeks to replicate, neither more nor less, a reference index such as the CAC 40 or the S&P 500. If these two approaches seem to be diametrically opposed, they increasingly coexist often in investors’ portfolios.

In Europe, index funds represented 24% of assets at the end of 2022, compared to only 8% in 2008, according to Morningstar. “The development of passive management is a major phenomenon of the last twenty years, notes Mathieu Caquineau, director of research on equity funds at Morningstar. Several reasons explain this. Index funds are transparent, since their portfolio exactly reflects the benchmark index. They are also less expensive, and above all more efficient in the long term.”

In fact, the figures show that active funds do not succeed in beating their benchmark index in the long term. “Some succeed over a period of one year. But over ten, fifteen or twenty years, success is rarely achieved, due in particular to excessively high management costs,” adds Mathieu Caquineau. For actively managed US stocks, these amount to 1.26% per year on average, while their index counterparts are satisfied with… 0.29%. This gap contributes to widening performances between the two approaches over time, as demonstrated by Morningstar’s annual barometer for Europe. Over ten years, at the end of 2022, only 19% of active bond products and 23% of those invested in stocks have managed to do better than their competitors. A poor result.

Choose a particular product

However, some do better than others. “Active managers do well in markets less followed by analysts, in which they can identify undervalued securities,” indicates Mathieu Caquineau, citing for example the shares of emerging stock markets in China or India. Conversely, their success rate on large, highly liquid markets such as American equities is particularly low: only 5.6% beat passive management over ten years.

Should we therefore give up investing in active funds? Not necessarily. “As an investor, you do not buy the average fund, but a particular product, which will manage to outperform if you choose it well,” assures Thierry Créno, head of diversified management for France at BNP Paribas Asset Management. His team therefore devotes a third of its investments to index funds, the balance to active management. “It is not a question of opposing the two approaches, but rather of implementing them in a complementary way,” continues the expert.

Index funds, particularly ETFs (exchange-traded funds or exchange-traded index funds) are a good solution for quickly gaining exposure to a market because they can be bought or sold at any time of the day. “We mainly use index funds on commodities and gold. On other categories such as government bonds and stocks, we systematically mix active and passive positions,” explains Michaël Lok, group manager. investments at UBP. Rather than choosing a side, the best option is to draw on both approaches to try to find the ideal combination.