Whenever investors analyze investment problems, especially when considering active investment or passive investment, please remember that human behavior factors will affect market dynamics to varying degrees, and investment managers in family offices need to be more aware of this.
Active investment vs passive investment, which is more attractive?
Active investment managers try to beat the market or related benchmarks through technical means such as stock selection and timing. On the contrary, passive investment managers avoid subjective prediction, focus on the long term, and strive to obtain returns close to the overall market.
The active manager constructs a portfolio different from the market, strives to maximize the return on investment through active securities selection and timing, and attempts to surpass the market or benchmark index. Active managers believe that they can beat the market through excellent analysis and research. Sometimes, these managers will consider fundamental factors such as financial data or economic statistics, or use charts to make technical analysis of historical prices, trading volume or other indicators, so as to predict future price trends.
With the popularization of efficient market theory, according to the theory of efficient market hypothesis, it is asserted that in the long run, no investor can continue to outperform the market unless he is particularly lucky. Even the most experienced fund managers can't accurately predict the company's performance every time, and few actively managed funds can surpass the market for a long time.
Every day, proactive managers tirelessly try to deny this assumption, exceed their own benchmarks, and get higher returns after adjusting risks. Facts show that their efforts are in vain. Therefore, active portfolio management strategy has been facing severe challenges.
Passive investment is considered as a more rational investment method. Passive investment is based on the idea that the market is efficient and extremely difficult to beat, especially after considering various costs. Passive managers seek the return of an asset class or a sector in the market. In order to do this, they invest in all or most of the securities in the target asset class very widely.
The most well-known passive investment method is "indexation", that is, buying all the securities it contains with full reference to the weight of the benchmark index. The investment manager then tracks (or replicates) the result of subtracting operating costs from the benchmark index. The most popular benchmark index is the Standard & Poor's 500 Index, which covers 500 large-cap stocks in the United States, accounting for about 70% of the total market value of the US stock market.
Passive investment can be considered as a low-risk, low-cost way to participate in the market without subjective consciousness. It is this view that makes passive investment more and more favored by investors. More and more funds are pouring into passive investment, which has changed the market environment. Investors need to examine the passive investment process more strictly.
Active investment has declined, while passive investment has risen rapidly with a rapid momentum.
In the past few years, no matter how hard active investment managers try, they still can't exceed the stock market benchmark. In this context, there is a dominant trend in asset allocation industry, and investors are gradually forced to shift from active management strategy to passive investment. Nearly $65,438+0.5 trillion of assets were withdrawn from active management funds and invested in passive management funds. RajMahajan, a partner of Goldman Sachs, estimates that a large part of daily transactions have been started through quantitative and systematic strategies, including passive investment tools, quantitative and algorithmic funds and electronic trading market makers.
Some financial commentators directly assert that active management has slowly gone to death. Of course, such reports have been greatly exaggerated. Admittedly, the recent performance of active management is really disappointing. For example, in 20 16, only one fifth of American stock managers exceeded their benchmark. After deducting expenses, the median performance is 3%.
So what may be hidden behind this? Experts believe that the answer lies in market conditions. On the whole, the stock market is rising steadily, which makes it difficult for active management investors to choose which companies are losers and which companies are winners, which means they don't need to provide risk management.
Facts have proved that these market conditions are also beneficial to many passive stock investors. As the market goes higher, funds that only seek to track benchmark performance will also go higher. They are not only roughly consistent with the rate of return of tracking the market, but also usually completed at low cost. In Japan and other markets, the popularity of passive strategy is particularly obvious, accounting for 70% of the Japanese market.
More and more investors turn to passive investment, which also affects the market situation. For example, a comprehensive acquisition of all the stocks of a particular index may lead to a closer correlation between these stocks, and may also lead to a substantial increase in the company's performance, both of which make it more difficult for active investors to surpass them.
Passivity does not mean "low risk"
Take the passive fixed income strategy as an example, it has some interesting properties, which is why there will be a continuous inflow of assets. Passive strategy can provide fast and convenient market access, but also provide liquidity and lower management costs. However, this does not mean that passive investment is "less risky" than active investment. Although the popularity of passive fixed-income products has been obvious since the global financial crisis, it still has its own inherent risks:
The first is the change in the fixed income benchmark of the largest generalized market (such as the Bloomberg Barclays American Composite Bond Index). In the past 10 years, US Treasury bonds have become the largest comprehensive part in the world and the most weighted securities in the index, but it is not without risks. The price of US Treasury bonds is completely related to interest rates. When interest rates rise, the price of American government bonds falls. Since the bond price moves in the opposite direction to the yield, investors are more vulnerable to the shrinking value of US Treasury bonds.
For passive fixed-income investors who follow the overall US market, the proportion of US Treasury bonds is rising, which means that the degree of diversification of investors is generally low. They allocate more low-yield investments and bear greater interest rate risks.
The return of market volatility should give active investment managers another chance to choose stocks.
Although the market environment is favorable for passive investment and unfavorable for active strategy, it is not expected to be so forever. The loose monetary policy of central banks is the main reason for the current market calm. But at present, several countries have been affected. And with the maturity of the economic cycle, history shows that volatility may return to the market.
The income generated by fluctuations enables active managers to use their stock selection and risk management skills and have the opportunity to re-select. To this end, we suggest that investors consider adding appropriate positive strategies to their portfolios. The key attributes we emphasize in active management include: persistent stock selection strategy, risk management process, tax efficiency and frequent visits to portfolio managers.
Active managers seek ways to reduce credit risk, interest rate risk and debt concentration, which passive strategies cannot provide. Proactive managers seek to expand opportunities and cross-domain allocation in order to find better credit methods. Of course, active management also has risks. In addition to the influence of inflation, future growth prospects and interest rate direction, managers also need to make judgments on credit value. We believe that experienced active managers will bring excess returns to customers in the field of fixed income investment and realize long-term capital growth.
Kaizhou point of view: the combination of active and passive double swords is powerful.
However, we do not rely entirely on active or passive strategies, but emphasize the potential benefits of combining the two. According to customers' investment objectives and risk tolerance, they can play an important role in creating diversified equity distribution.
In the past few years, the investment performance of passive index and ETF has been very good, which has prompted people to re-examine this indisputable debate. However, with the normalization of interest rates by the Federal Reserve, it is expected that there will be more market fluctuations, and only adopting a passive strategy may not be effective in the next few years. Investors trying to achieve long-term return goals will need to adopt active and passive strategies and develop tools to understand the differences in capital market efficiency. Active investment is irreplaceable by passive investment, and the inefficiency or inefficiency of financial market itself will give active investors an eternal stage.
Initiative and passivity are not mutually negative. From the perspective of overseas market development, passive investment concept and active investment concept have been integrated with each other. From the perspective of investors, rational asset allocation is more critical. Passive and active investment can be described as a pair of "golden partners", and the organic combination of the two is conducive to the improvement of asset allocation effect.
The active management method provides more opportunities for the less efficient asset classes to surpass the market, while the passive investment method may be more suitable for the more efficient asset classes. In other words, we can use the differences of asset categories to determine active and passive strategies when making the overall portfolio.
For example, under the touting of Wall Street analysts, it is difficult for large US stocks to identify undervalued companies. For this effective asset class, passive investment method may be appropriate in some cases and may be more effective. In contrast, stocks in emerging markets are generally lack of research and difficult to evaluate, which provides more opportunities for active investment managers to identify companies. The key is to recognize the differences and make the right choice.