More Hybrid Funds Could Emerge as Passive-Active Battle Rages On

Passive versus active—it’s an ongoing battle that is sure to persist in 2020 and while the two duke it out for fund strategy supremacy, there could actually be more funds emerging that combine both strategies—based on research from European firm Cerulli Associates.

The struggle between active and passive is typically centered on fees. Does the high cost of active management justify their performance gains and as more consumers prioritize cost when it comes to making investment decisions, does this put passive funds at firm advantage over active funds?

This brings us to funds that can take the best of both worlds and offer a hybrid alternative.

“An investment model—structured around service provision and its high level of value rather than sales of yet another active equity fund—looks set to provide an alternative to active management fees,” said Justina Deveikyte, associate director, European institutional research at Cerulli Associates.

Per a Traders Magazine article, active management “has been chipped away at by demand for strategies that offer similar exposures but without the fees, such as smart beta and “active” exchange-traded funds (ETFs). The latter, now established in fixed income, allow investors to tap products with, for example, higher or lower allocations to certain issuers to access the market in a ‘smarter’ way, deviating from the benchmark, but still within a rules-based, systematic approach.”

As far as asset class goes, Cerulli is predicting that hybrid products will make their way into equity funds first.

“For example, thematic exposure to developed equity markets, whereby active ETFs offering hand-picked, then packaged-up, basket exposure to broad themes such as robotics, climate, or rapid urbanization, is set to thrive,” said Deveikyte.

Additionally, Cerulli found that the tides are shifting from a price war among active and passive funds to one that is centered on value and outcomes. This can include the sprouting of more thematic funds, which is already being seen in the ETF landscape with a variety of products focusing on various investment niches, such as ESG, smart beta, disruption, and other themes.

“Straightforward active equity will continue to face strong headwinds, yet the distinction between active and passive is starting to soften and the trend for thematic exposure, and the industry’s shift to services rather than products promises new avenues for growth,” says Deveikyte.

The active versus passive battle is something that could be manifesting itself on a global scale. Cerulli found that less stringent regulations in China can also open up avenues for more funds that could include hybrid strategies.

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