Low fees and low-interest rates continue to push investors to passive instruments, but where are they most effective? One investment professional gives his take on the rise of passives.
Selector: Hans-Peter Kellenberger
Company: CAT Financial
Due to low-interest rates, the demand for passive products has risen significantly over the past few years. We use them more than we did several years ago because the outperformance of certain markets is not that important anymore. We use passives for blue-chip markets, sector products or special themes where we see opportunities.
Actively-managed products are useful too, but these go hand-in-hand with a different approach to the market. Where FX is involved, we tend to use more active than passive approaches.
The more efficient a market is, the more passives are used, and US or European markets are very good examples. In both spaces, you are able to see the products with the most volumes and it’s easy for investors to follow these markets efficiently, with low costs.
Emerging markets are becoming more efficient and more liquid, but it will take some time before investors see the same conditions we currently have in the eurozone or US. For emerging markets, we use more actively-managed products, mainly because the actual selection of certain areas in the space is crucial.
Most of our clients like standardised products or mandates because they probably don’t understand the strategic approach of a passive vehicle. Nevertheless, we expect the popularity of passives to rise even more.
Another prominent factor is costs, as passives are generally cheaper than active strategies. Complex products are fine to use if they are correctly allocated in a portfolio’s structure.
Ultimately, the way clients approach risk will help them decide the best products to allocate to.