The past half-decade’s diversified macro environment has been great for passive investing instruments, but it may give way to less efficient markets and more active strategies, Richardson GMP’s Craig Basinger says in a market note.
Basinger says neither active nor passive management is superior, though there are two critical factors that determine which investment style has the upper hand. One of those is the index construction: not all indexes offer the kind of quality construction or diversified holdings investors are looking for.
The second factor is whether we’re in a macro- or micro-driven market environment.
“Macro-driven markets are those where big data points, such as central bank policy, economic data or other broad reaching forces, are the bigger driver[s]. Conversely, micro-driven markets tend to have individual company or fundamental data as the bigger driver,” he says, adding that the current market environment is signalling a coming shift.
“Given change is the only constant in the market, what could change this environment? Well, quantitative easing does appear to be on the decline and some central bank tightening may lead to greater disparity. This may tilt the balance back to active, but at this point it may be too early to dump those cheap ETFs for active managers.”
Basinger suggests investors take a balanced approach, with a leaning, depending on the market. In more efficient and well-diversified markets, lean more toward passive investment strategies, and in less efficient markets that are not as well-diversified, lean more toward active managers that can better control risk and exposures.