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What role has passive management left for active?

Thursday, November 15, 2018
Opalesque Industry Update - Studies by the Lyxor Dauphine Research Academy show that active management benefits from the readier availability and greater use of passive tools.

The increased role of index-based investing is more an opportunity than a threat for active managers. It creates a more effective equilibrium where each management style has a distinct role to play.

Results of new research supports the conclusion that an informed combination of active and passive management is crucial to long-term performance.

The Lyxor Dauphine Research Academy is a joint initiative, established in 2015, between Lyxor Asset Management and the University Paris-Dauphine House of Finance to commission high quality researchers from across the world to produce academic papers on selected investment subjects.

In 2018, the Research Academy has focused on the relationship between passive and active management, specifically looking at what role the growing passive space has left for active managers. The research it has commissioned has identified a number of notable findings, including:

The research of Cao, Hsu, Xiao and Zhan provides evidence that the introduction of passive funds has helped investors by increasing competition in asset management. Specifically, the increasing availability of smart beta funds is forcing active managers to demonstrate that they can deliver true alpha in order to continue to gather flows.

The research paper from Breugem and Buss provides evidence that, at some point, the increasing use of passive funds could create extra opportunities for active managers. This could then help active managers to improve their performance and, in turn, to increase the fund flows they attract.

Overall, in combination, the two research papers sponsored by the 2018 Lyxor Dauphine Research Academy suggest that a point of equilibrium will be reached on the asset management market between the share held by passive investment and that held by active investment.

Commenting on the research findings, Marlene Hassine Konqui, Head of ETF Research at Lyxor Asset Management, said: "There's no doubt that passive asset management has enjoyed huge growth in the last decade. Yet, Passive funds still represent a small part of the asset management industry. But their usage is making investors more sensitive to complex measures of active management skill.

"So, while ETFs are helping generate a more competitive asset management marketplace, they will not replace the best-performing active managers. Therefore, both management styles will take a distinct share in the market as they both have a role to play in investors' portfolio construction".

Benjamin Bruder, Head of Quantitative Research at Lyxor Asset Management, added: "We have long held the view that a combination of active and passive management helps to deliver optimal portfolio performance, and the findings of the papers sponsored by the Lyxor Dauphine Research Academy would further support this view. To that end, the idea of active versus passive management is something of a misnomer, as exposure to both can bring added value to portfolios"

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