Presentation Active vs Passive Management


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This presentation surveys one of the longest enduring debates in investment management: active vs. passive management. Expliciting and managing expectations from pension fund trustees and investment is the sensible route to take.

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Presentation Active vs Passive Management

  1. 1. Active vs.passive managementDecidingwhether to manage yourfundactivelyorpassively<br />Alfred Slager<br />January 25th 2010<br />
  2. 2. Debate matches Kain and Abel<br />
  3. 3. Ideasaboutactivevs.passive<br />The discussion more relevant to asset managers than to trustees<br />Active, passive management are trueinvestmentbeliefs and shouldbetreated as such.<br />Recent research with Koedijk and Bauer suggeststhat pension fundsachievehigher net returns withactive management, butnoton a risk adjusted basis, shifting the question back to passive<br />Over time, there is nosuchthing as activevs.passive management: theywillconverge<br />
  4. 4. Tracing the origins of the debate (1)<br />
  5. 5. Tracing the origins of the debate (2)<br />
  6. 6. 40 years later: conflictingmessages<br />Academicliterature shows rationaleforbothactive and passive management<br />Returns fromactive management are difficult to achieve - butnotimpossible. Costsget in the way<br />Returns fromactive management (alpha) and passive management (beta) show similar (unwanted) characteristics in times of crises<br />Perception: glamour is in alpha, beta is commodity<br />Focus onactive management has leftpassive management wanting of furtherdevelopment; picked up in recent years<br />
  7. 7. So the debate continues…<br /><ul><li>7</li></li></ul><li>…also because pension funds and asset managers differ<br />Pension fund Asset manager<br />Risk diversification<br />Risk premiums<br />Responsible Investments<br />Goals<br />Inefficiencies<br />Active management<br />Teams and staff<br />Focus<br />Impact<br />Risk man.<br />Koedijk and Slager (2006, 2008)<br />
  8. 8. Finance & Investmentsyoung discipline<br />Initialapproach the physicsway: stillmainstream<br />Humansget in the way<br />No “hard” scientificlaws, parameters<br />Humans are not monotone in theirbehavior<br />Humansinfluencepredictions<br />We have notyetfound a way to reachfirmconclusionsabout the major debates in finance<br />Neithershould we expectit in the near term<br />Embeddingbehavioralfinancepromising avenue<br />We have therefore to articulate theinvestmentbeliefsbehind the debates and choices.<br />
  9. 9. Everystrategy is basedonbeliefs<br /><ul><li>Belief: View on how the financial markets work, usually implicit
  10. 10. It’s a belief because we cannot be sure
  11. 11. Making these beliefs explicit shape better investment policies
  12. 12. Investment beliefs cover
  13. 13. Financial Markets
  14. 14. Investment Process & Organization
  15. 15. Ethics</li></ul>“Valuations of stocks revert to the mean over time”<br />“Investors consistently overreact” <br />’’Consistently outperforming the financial markets is extremely difficult’’<br />“Costs are certain, net returns are not” <br />
  16. 16. Theory behind investment belief<br />Investment Belief Theory Investment Strategy Organization<br />
  17. 17. Galileo & Copernicus<br />
  18. 18. FDR ‘32<br /> So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself—nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance. <br />
  19. 19. Gordon Gekko ‘87<br /> Greed, for lack of a better word, is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures, the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge, has marked the upward surge of mankind and greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the U.S.A.<br />
  20. 20. Obama ‘12<br />
  21. 21. Most things are basedonbeliefs<br />Shouldbe “evidencebased”, mightnotalways express consensus and canbedownrightsobering.<br />Are notalwaysappreciated<br />Offer perspective<br />Might have anethicaldimension<br />Shouldberealistic in terms of expectations<br />
  22. 22. 2010 Research project for ICPM<br />What (implicit) beliefs are behindinvestmentchoices made by a pension funds?<br />Whatbeliefsreally matter?<br />Whatrelationship is therebetweeninvestmentchoices and performance?<br />
  23. 23. Workingwith the CEM database<br />219 pension funds<br />3.600 billion US dollar<br />1992-2007<br />
  24. 24. Method<br />Step 1<br />Find indicators as proxy for the individualinvestmentbeliefs<br />Rank portfoliosbasedon indicator – do we observean effect on performance measures? <br />Step 2<br />Combine all indicators in oneanalysis (panel data) to account forinteraction – how are resultsinfluenced?<br />
  25. 25. Investmentdebates and beliefs<br />
  26. 26. Impact of investmentbeliefs<br />Impact on<br />performance<br />Costs<br />Horizon<br />Active <br />Management<br />Internal<br />Management<br />Alternatives<br />Diversification<br />
  27. 27. Evidencebasedinvesting<br />Someinvestmentbeliefs are no-brainersfor a pension fund: <br />Loweringcosts<br />Improvingdiversification<br />Someinvestmentbeliefsrequire a strongerconviction / argumentationwhytheyshouldbeincluded:<br />Alternatives<br />Active Management<br />
  28. 28. Relevance to active-passivedebate<br />Governanceapproach<br />Passive base case. Start investmentphilosophydebatewithdiversification and low costs<br />Nextdiscussionwhat the fundexpectsfromactive management, why, and iftheyable to implement the strategiessuccesfully.<br />Trendwatching:<br />Raise bar to includeactivestrategies<br />Discussionbasedoninvestmentbeliefs, ifthey’revalid and practical<br />Improvequality of passivestrategies<br />More research willbespentonimprovingdiversificationinstead of finding the nextanomaly.<br />Fundamentalindexing<br />Low volatilitystrategies<br />
  29. 29. Checklist<br />
  30. 30. Questions? Background info<br />Koedijk, Kees C. G., Slager, Alfred and Bauer, Rob, <br />InvestmentBeliefsthat Matter: New Insightsinto the ValueDrivers of Pension Funds (May 8, 2010). <br />Available at SSRN:<br /><br />