Multi-Asset Insights: The hidden risks of going passive
Disaffection with underperforming fund managers can push investors towards ‘passive’ management of their assets. Sometimes the rationale for this shift is that the average returns from active management may not justify its higher cost.
We think it would be a mistake to believe that going passive is a low risk route to success or that it offers a ‘set-and-forget’ approach. We therefore consider the potential risks of adopting passive approaches.
In this paper we argue that:
- Different portfolio returns are the result of both asset allocation and active stock selection decisions.
- Passive indices can contain unwelcome biases and hidden concentration risks, while also increasing investors’ exposure to wider systemic risk.
- Active management is required to ensure that capital is allocated efficiently within markets.
- Certain active managers can outperform passive indices over the long term, often those with high ‘active share’, but it is important not to let expenses eat up the excess returns.