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Low expected returns may favor active investment: Despite lower cost, passive won't get investors very far - Netherlands Roundtable

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For active managers, the Dutch professional investor community is one of the hardest to crack. With very mature pension plan and insurance markets, The Netherlands are, along with the UK and Switzerland, among the top three most cost-effective countries in the world for their pension system. A number of players are now aiming to bring this institutional approach to investing to the retail market.

Also in the Netherlands investments are shifting from active to passive management. But the Dutch quant funds are holding up well as low expected returns could turn the tide in favor of active again. In addition, "passive" does not mean investors are doing nothing as on the strategic level, everybody has to be active and making choices all the time: which benchmark to use, how much of your assets go into which investment or asset class, rebalancing, or using tactical asset allocation. All those are active choices.

Low expected returns could favor active investment strategies

But even in the light of this, the active versus passive debate isn't that straight forward as it may appear. Of course, everyone agrees that a major problem over the last few years has been the underperformance of active managers who charge higher fees. But we also know that going forward expected returns are quite low and therefore investors just can`t expect much returns from such traditional portfolios (page 8-9). Despite the lower cost aspect, passive investing probably is not going to get investors very far. In addition, investors may also factor in a possible deflation risk should the Trump rally turn out short lived. Good news for investors is certainly that the active side of the industry is reacting and is creating more low fee products (page 10).

So maybe in this active/passive debate there should still be a place for active strategies that produce alpha, particularly when investors invest on a short to mid term basis (page 8-9). A diversified portfolio will benefit from allocations to alternatives like hedge funds and private equity which offer attractive returns with a lack of correlation.

This Opalesque Netherlands Roundtable took place end of 2016 in Amsterdam with:

  1. Cornelius Mueller, Institutional Sales, Eurex / Deutsche Boerse
  2. Freddy Forger, Partner, Blu Asset Management
  3. Gildas LeTreut, Head of Prime Services, ABN AMRO Clearing
  4. Iavor Botev, Quantitative Portfolio Manager, Aegon Asset Management
  5. Oliver Gaunt, Investor Relations Manager, Saemor Capital
  6. Patrick de Koning, Fund Manager, Hague Fund
The group also discussed:
  • From which investment horizon on should investors consider active over passive (page 8)?
  • What do Dutch investors want when they invest in funds (page 11)
  • The Alpha Challenge: In the past, for every 50 winning funds there were 50 losers. Why does it appear today that for every 10 funds winning there are 90 losing (page 11)?
  • How to build exposure to Commodity Trading Advisers (CTAs) (page 11-12)
  • The importance of fund capacity and how to model it (page 12, 13)
  • How can investors identify when a fund has grown over its optimal size (page 13)?
  • Why most robo-advisers are actually not that smart (pages 13-14). How do some robots-advisers deceive investors (page 14-15)? How may robo-advisers add more systemic risk (page 16)?
  • What should passive investors do when market go down (page 16 - 18)?
  • How can artificial intelligence and machine learning be used for investing (page 18 – 20)?
  • Quantitative over qualitative investing (page 20)?
  • Exchange innovations: Total return swaps are now completely futurized (page 21)
  • Investment opportunities (page 22)
  • What is reverse capital introduction and who is offering it (page 23)?
  • Fixation on liquidity: An unhealthy obsession of long term investors (page 24-25)

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