Investors ”Caught in the Crossfire of Active vs. Passive,” Finds Natixis Study
May 28, 2019
Investors are “caught in the crossfire” in the debate on active versus passive investing and need more nuanced information on the merits of each approach, concludes the ninth annual survey of individual investors from Natixis Investment Management. Investors generally prefer active management, but many investors have dangerous misconceptions about the role that passive management plays in portfolios. The survey, which summarizes the views of 9,100 investors globally, was conducted in September 2018, with the goal of understanding investors’ views on the markets, investing and progress toward their financial goals. Investors from 25 countries were represented in the survey.
Ultimately, write the authors,” investors may have only heard part of the story” when it comes to the conversation about active and passive investing. Key insights on this issue from the study include:
Essential Preference for Active Management
Notably, 72% of investors worldwide say they “prefer to have an expert find the best investment opportunities in the market.” In fact, two-thirds of those surveyed expect their mutual funds to be actively managed and look substantially different from the benchmark.
At the same time, roughly three-quarters of investors believe that it’s important to both beat the benchmark and to take advantage of short-term market movements. An even greater proportion (nine out of 10) believe that protection from volatility is essential.
Dangerous Misconceptions About Passive Management
Investors appear to understand the basics of passive investing. Specifically, seven in 10 (71%) understand that a passive investment generates market returns, while 57% are aware that passive investments lower fees.
However, the survey finds that investors also suffer from misconceptions about passive management that could be hazardous to their financial health. Significantly, approximately two-thirds of respondents believed that index funds have lower risk and that passive investments help minimize losses. Unfortunately, as the authors note, index funds are exposed to the same level of risk as the market overall and can’t generate gains for investors when markets are declining.
Media Focus on Fees Has Created Confusion
The survey’s authors suggest that the financial media’s focus on fees has left individual investors with “an incomplete understanding of what passive investments can provide and what they cannot.” They express concern that this leads individuals to extrapolate from a lower fee to “greater advantages for passive investments than index funds can deliver.”
They conclude that “the discussion of active/passive has been generalized into a showdown of good and bad,” leaving investors caught in the crossfire.
Active management and passive management each have their strengths and weaknesses. Active management enables investors to navigate complexity, to customize portfolios, to capitalize on specific skills or to profit from market inefficiencies. Passive management helps to reduce costs while providing diversified exposure to an asset class, sector or region. Most investors will benefit from a combination of the two approaches, with the mix determined by their particular objectives, skills and risk-tolerance.
As the active/passive conversation continues to evolve, the need for education is apparent. That’s precisely why the Active Managers Council has curated research and thought leadership on this important topic. For more insight please visit the Council’s Research & Thought Leadership section to review a growing library of content on active management.