From 2013 to 2023, most actively managed strategies failed to outperform passive alternatives, prompting a reassessment of the value of active management.
However, as high interest rates and market volatility persist, active investment strategies are garnering renewed attention.
Some of the world’s largest asset owners such as Japan’s Government Pension Investment Fund (GPIF) and Norges Bank Investment Management (NBIM), Norway’s sovereign wealth fund manager, are increasingly utilising active management strategies to optimise their investment portfolios.
GPIF, recognised as the largest pension fund globally with ¥219.2 trillion ($1.51 trillion) in assets, has recently adopted a more active approach to managing its investments. In response to underwhelming performance by incumbent managers and, more recently, in a bid to secure the higher returns needed to support a rapidly ageing population, GPIF Chief Investment Officer Eiji Ueda has spearheaded a shift in strategy.
Over the past year, the fund expanded its active foreign equity managers from seven to nearly 30. This move was intended to diversify risk and enhance the fund's overall performance.
The $1.4 trillion Norwegian NBIM faced a challenging third quarter, posting a loss of $34 billion compared to the preceding half-year, according to its latest financial results.
However, NBIM credits its effective implementation of active management techniques as having helped to mitigate its losses. By employing active management strategies, NBIM achieved a return that was 0.17 percentage points higher than the benchmark index, a difference of approximately $2.5 billion.
Even as the fund’s losses have come to the fore in recent days, the value of active management in minimising portfolio-wide losses and maximising gains has also become apparent.
By engaging a broader range of active funds, asset owners aimed to leverage the diverse investment strategies offered by multiple managers, enabling them to adapt to changing market conditions more effectively and capitalise on investment opportunities that perhaps would have been overlooked by a more passive approach.
While passive investing has long been favoured for its low costs, recent data is challenging its position as a superior route to higher returns, according to Peter Branner, chief investment officer at abrdn.
“If you look at it from a global perspective, the more specialist area, the more there is a reasoning for active, whilst the broader very liquid and well researched markets such as US large-cap attracts more index money,” Branner told AsianInvestor.
As markets remain unpredictable, investors seek strategies that can adapt to changing conditions. Active management offers the potential for skilled portfolio selection and risk management, allowing investors to navigate market fluctuations and identify undervalued assets.
“The US small cap for instance, is a typical area where we are active in and have been able to deliver alpha. Similarly in emerging market equities, such as Asia where we have had local presence for more than 30 years, we aim to deliver style specific alpha over a business cycle,” he said.
Active management is also crucial for sustainability investing, especially if a client wants impact investing, said Branner.
“The Sustainable Disclosure Requirements adds due diligence criteria for security selection requires more than a passive autopilot,” he said, referring to coming sustainable investing requirements to be implemented by regulators in the United Kingdom. “We also see more merit for an active approach as the data quality is generally too low and global harmonisation of company reporting still at incubator stage.”
IT’S ALL ACTIVE
Every investment decision is an active one, according to Rory Caines, APAC ETF Specialist at JP Morgan Asset Management.
“Even if you choose to use a passive investment strategy, it is important to understand that you are selecting a defined investment approach over another, whether that be market-cap weighted or otherwise,” Caines told AsianInvestor.
Selecting an active approach, and entrusting investments to those with specific expertise in a chosen area, enables you to generate excess returns not only driven by selecting the strongest securities within the universe, but also by excluding the underperformers.
“An active approach also allows you to target specific outcomes in a more effective way such as income, growth or ESG. In a high interest rate environment where the disparity of returns within sectors increases, selecting the most robust securities and more importantly, avoiding the worst, is even more important,” said Caines.