Active v passive – it’s horses for courses

It is not just about active versus passive but also about horses for courses, according to the latest Morningstar Australian Active/Passive Barometer.

Simply put, active strategies are more effective in some categories such as Australian mid/small cap blends, while passive strategies prove their worth in the world large blend category.

The Morningstar analysis looked at nine categories, three of which it highlighted as being conducive to active strategies – global bonds, Australia mid/small blend and world large blend.

It noted that, in bonds—global, passive strategies are benchmarked to market-cap-weighted indexes which are dominated by sovereign bonds and characterized by high duration, but then stated:

“Meanwhile, active funds have a higher propensity for taking on credit exposure and have flexibility on setting duration. Duration measures interest-rate sensitivity, namely, the longer a fund’s duration the more sensitive it is to changes in interest rates.”

“Over the last few years, the rapidly rising interest-rate environment in developed markets has resulted in a strong period of relative performance for the average active fund versus the average passive fund,” it said.

“Overall, both resulted in a negative return. However, this category illustrates that the flexibility of active managers versus passive funds can lead to a meaningful upside over the long term.”

It said the results for the Australia mid/small blend category were also encouraging for active manager and supported the Morningstar view that indexes tracked by passive funds in the category are not as efficient as in other categories.

The analysis said that the lower end of the market-cap spectrum carried enough inefficiencies through which active managers could add value over passive benchmarks with the gap widening at longer time-frames.