Time to Be Active
Passive and active investing approaches have their advantages and disadvantages, and the choice between them ultimately depends on an investor’s goals, risk tolerance, time horizon, and investment philosophy. While passive investing may offer simplicity, lower costs, and broad market exposure, active investing may appeal to those seeking to outperform the market or take advantage of specific investment opportunities.
In recent weeks, financial titans such as UBS Wealth Management and BlackRock have stated that the coming year and beyond will be more favorable to active investors than passive ones as the Federal Reserve prepares to cut interest rates.
Institutions are excited by the prospect of beating the market, and they’re confident enough to take the risks of active investing to do so. However, actively managing a portfolio does not imply frequent trading, but rather keeping an eye on market movements, rebalancing the portfolio as appropriate, and adapting strategies in response to changing economic conditions.
“When I think about the opportunity for alpha [beating index funds], that’s where I get really excited — the most excited I’ve been in 20 years actually,” Tony DeSpirito, BlackRock’s CIO of fundamental equities, said in a recent meeting. In its January note, BlackRock advised investors to keep some index funds in their portfolios while removing others in favor of actively managed investments.
Nearly 70% of professional fund selectors from some of the leading U.S. wealth management firms believe that active fund management is essential to investment outperformance in 2024, according to Natixis Investment Managers
This follows 58% of respondents reporting that actively managed funds on their platforms exceeded their benchmarks last year, and 65% believe the markets will continue to favor active management.
Many managers are strengthening their active strategies by adding additional active exchange-traded funds (ETFs) and direct indexing alternatives, with 72% saying their firms presently offer semi-transparent ETFs, and 90% or more intending to keep or add more actively managed ETFs. Another 71% provide direct indexing options to investors, while 84% will preserve or expand access to these strategies.
“Active managers may be able to capitalize on elevated levels of dispersion. We see opportunities for high conviction stock pickers, flexible bond managers, and idiosyncratic alternative strategies to drive better portfolio outcomes in 2024,” said Carolyn Barnette, head of market and portfolio insights for BlackRock’s U.S. Wealth Advisory business.
While passive investments have historically outperformed active funds, 45% of fund managers attribute their success to US monetary policy, or years of low interest rates and little to no inflation, according to Natixis data.
“Fund selectors expect the 2024 investment landscape to be anything but normal, not by historical, new- or next-normal standards,” said Dave Goodsell, head of the Natixis Center for Investor Insights. “They are looking to manage client investments, the client experience, and relationships by adjusting their firms’ product and model portfolio offering to help clients stay invested and armed with protection in unfamiliar investing territory.”
If a recession occurs in 2024, 61% believe the market slump will impede passive investment performance. Furthermore, 49% of fund selectors believe that investors rely too heavily on passive investments such as index funds.
The majority (57%) of fund selectors are confident about this year’s market performance. Their outlook, however, is clouded by a high level of uncertainty and unanticipated risk. The prospect of weaker growth ahead places recession at the top of the economic threat list at 54%.
The findings are based on a survey of 198 U.S. fund selectors conducted in December 2023. Respondents represented private banks, wirehouses, RIAs and RIA aggregators, independent or individual wealth managers, and other investment advisory firms that collectively manage nearly $20 trillion in client assets.