The Opportune Time for Active Investing

January 31, 2022

The comparison between passive and active investments has always been a perennial debate in the world of finance. More often than not, passive investing has emerged as the winner because of its advantages of the low costs of investing, quick and easy market access, and the gain predictability. In addition, there has been a recent shift toward passive investing in the past few years with the Exchange Traded Funds (ETFs), a type of passive investment clocking about $200 billion in the USA. 

However, active investing has undeniable merits for being the preferred type of investing. 

One of the key reasons active investing has begun to find traction nowadays is that active investments have always performed much better than passive markets over diverse market cycles. The study carried out by the American investment management company Invesco identified 61% of the active investment funds outperforming their benchmarks set across multiple market cycles. The study found that the active investment share asset funds eventually recorded more returns per unit of risk than the benchmarks. 

Another crucial and pertinent argument that shifts the scale toward active investing, especially in the current economic situation, is that active investments tend to tide over adverse economic conditions much better than passive investments. Thus, they are highly suitable for markets such as Europe and Asia, where there is always a very high possibility of economic and political changes. Businesses would have to be patient and analyse and study the market conditions before taking the plunge. Active portfolio managers are better suited for such analysis, research, and exploiting these volatile markets than passive investing, which does not have the same luxury.

Although passive investments tend to do well when the market interest rates fall, active investments have emerged as the winner when there is a fall in the global financial markets interest rates. This is highly significant in the current global financial market scenario, where interest rates have started climbing at a slow and measured pace. 

Another argument often made against passive investing is that the rise of passive investments may lead to less efficient markets. Since it is about making investment decisions based on the current market trends, the increase in passive management also implies fewer people are analysing and studying the long-term benefits of companies and businesses. 

Consequently, this leads to a demand for active investing. Its quintessential features include a more significant role for business managers who can take investment decisions such as risk management by identifying and avoiding specific risk-prone sectors, freely and without any constraints. This is hugely beneficial to companies and industries. 

Yet another argument vis-à-vis asset allocation that bolsters active investing is that it cannot be passive. It has to involve portfolio managers playing an operative role in investment decision-making and taking advantage of the opportunities and trends in the market.  

Asset allocation based on active strategies is also best suited in less efficient and illiquid markets requiring more intervention, such as investments in the top business space and the small business segment, which is best done with more intensive research and analysis by portfolio managers. Active investments are the best choice for illiquid assets as they offer various options for different duration bands and strategies, such as credit. They also provide flexibility in replicating the fixed income index.  

Although markets have started recovering post the global financial markets’ disruption triggered by the onslaught of last year’s pandemic, the situation remains uncertain as markets are still volatile. When they recover is anybody’s guess. Thus, active investing is the best bet for portfolio managers and businesses as they can take investment decisions based on long-term situations and reap their benefits.