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The growth of passive investing can actually be positive for active management and should be viewed more as an opportunity than a threat.
This is the conclusion of Lyxor Dauphine Research Academya joint initiative between Lyxor Asset Management and the Paris-Dauphine University House of Financeswho recently studied the relationship between passive and active management, examining the role that the growing passive space has left to active managers.
Their research identified evidence that the introduction of passive funds helped investors by increasing competition in asset management. In particular, the growing availability of smart beta funds requires active managers to demonstrate that they can deliver true alpha in order to continue to collect flows.
The research also found evidence that at some point the growing use of passive funds could create additional opportunities for active managers. This could then potentially help active managers improve their performance and therefore increase the flows of funds they attract.
Overall, in combination, the research suggests that an equilibrium point will be reached in the asset management market between the share held by passive investing and that held by active investing.
Commenting on the research findings, Marlene Hassine Konqui, Head of ETF Research at Lyxor Asset Management, said: “There is no doubt that passive asset management has grown tremendously over the past decade. . Yet passive funds still represent a small part of the asset management industry. But their use makes investors more sensitive to complex measures of active management skill.
“So while ETFs help create a more competitive asset management market, they will not replace top-performing active managers. Thus, the two styles of management will take a separate share in the market because they both have a role to play in the construction of the portfolio of the investors”.
Benjamin Bruder, Head of Quantitative Research at Lyxor Asset Management, added: “We have long believed that a combination of active and passive management achieves optimal portfolio performance, and the findings of articles sponsored by Lyxor Dauphine Research Academy would further support this view. To this end, the idea of active versus passive management is somewhat misplaced, as exposure to both can add value to portfolios”.