The role of passives over the past five years has changed dramatically, anyone who tells you something else is dishonest, according to Lyxor’s Nicolas Moussavi.
Speaking to Citywire Selector, Moussavi, who heads up mutual fund and alternative manager selection at Lyxor, said there are two reasons for the shift in active versus passive.
‘First, we are using more passive investments because the number of available products has soared in all asset classes. These are competitively priced and most have a very low tracking error.
‘Second, we are using more and more passives in our allocation – simply because our clients, and we as multi-managers, are looking for a pure indexation. This is the perfect product when the replication method is accurate.
Moussavi has long-believed that low-cost passive funds have an important role to play.
‘We are also firm advocates of active and alternative asset management. All three approaches – passive, long-only active and alternative – have a vital place in clients’ portfolios. There is a place for both passive and active.
‘We have to acknowledge that one solution has to be favoured over another. For example, it is very difficult for investors in US large-cap equities to beat the S&P 500 because these stocks are covered by hundreds of sell-side analysts, limiting the amount of arbitrage opportunities. However, the US small-cap market attracts less analysis so active managers have a better chance to outperform.
Elsewhere, Moussavi said when you track an emerging index you can sometimes be exposed to low-quality, quasi-sovereign companies you don’t want to own.
‘The method of replication is important as well. On emerging equities, synthetic replication is generally more effective and less expensive.'
Moussavi said passive and active should be seen as complementary, and highlighted that low rates, low returns, regulatory constraints and client needs should all be encouraging investors to rethink their approach.
'Our industry will probably be transformed with a new segmentation including passive, good active managers and smart beta. Clients are not looking for complexity but the right product at the right price, depending on its own constraints.
‘At the moment ETFs are primarily used by institutional clients in Europe. The real challenge for ETF providers is to break into the retail space. Regulatory requirements such as MiFID II or the advent of robo-advisers could influence that development.’
This article was originally published in the June edition of Citywire Selector magazine.