Active versus passive management - UNIGE & UBS Discussion - Part 1

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Securing Investment Returns in the Long Run

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University of Geneva

Securing Investment Returns in the Long Run

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Cours 4 sur 5 dans Specialization Investment Management

In this course, you will learn about the famous dichotomy between active and passive investing, how to appropriately measure and analyze investment performance and what the future trends in the investment management industry are. You will first learn about absolute and relative performance, risk-adjusted returns and how to decompose investment performance. The focus will then shift to the two main categories of investment vehicles, active and passive funds, and what they entail in terms of expected performance. Finally, you will explore the worlds of sustainable finance, neurofinance and fintech, three areas of research that will shape the future of the investment management industry. You will also benefit from the insights of experts from UBS, our corporate partner, on the practical implementation of the various concepts we will develop in this course.

À partir de la leçon

Investment Vehicles

Welcome to the third module of the course! In this module, we will explore the worlds of active and passive funds and try to address whether or not active fund management provides added value to a portfolio. But before doing so, we will see how to choose the best investment vehicles among both active and passive funds. The module ends with a discussion with our corporate partner on topics that often divides the world of finance between academia on one side and practitioners on the other.

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Active versus passive management - UNIGE & UBS Discussion - Part 19:57

Active versus passive management - UNIGE & UBS Discussion - Part 211:10

Rencontrer les enseignants

University of Geneva- Tony Berrada
SFI Associate Professor of Finance
Geneva Finance Research Institute
University of Geneva- Ines Chaieb
SFI Associate Professor of Finance
Geneva Finance Research Institute
University of Geneva- Jonas Demaurex
Teaching Assistant
Geneva Finance Research Institute
University of Geneva- Rajna Gibson Brandon
SFI Senior Chaired Professor of Finance and Managing Director of the GFRI
Geneva Finance Research Institute
University of Geneva- Michel Girardin
Lecturer in Macro-Finance - Project Leader for the "Investment Management" specialization
Geneva Finance Research Institute
University of Geneva- Philipp Krueger
SFI Assistant Professor of Finance
Geneva Finance Research Institute
University of Geneva- Kerstin Preuschoff
Associate Professor of Neurofinance and Neuroeconomics
Geneva Finance Research Institute
University of Geneva- Olivier Scaillet
SFI Senior Chaired Professor of Finance and Vice-dean (research) at GSEM
Geneva Finance Research Institute
University of Geneva- Philip Valta
SFI Assistant Professor of Finance
Geneva Finance Research Institute

[MUSIC]

So hi, everyone.

Active or passive?

We've seen a lot in these modules about the various pros and

cons and on the active management versus passive management.

So we're going to have a little debate

on active versus passive management together with someone from UBS.

Hello, David Hochuli.

You work at UBS in Zurich.

What do you do there?

>> Hi.

I run the front equity research team.

And we are basically selecting and

monitoring active managers, but also passive investment product.

>> Okay, so you do both.

I'm pleased to see that you dress casually.

I was going to wear my suit, some suites that I keep for a while, when I was

a banker, but I'm happy to see that many people at UBS dress like casually.

[LAUGH] Casual Thursday.

So what is the general stands of UBS in this active

versus passive management debate?

>> As a global wealth manager, we are actually giving both instruments to our

clients, or offer both type of instruments to our clients, both active and passive.

I think both forms have their advantages and disadvantages and

our client advisers are confronted ways individual people who

have their objectives, risk tolerance, and time horizons.

But also in our discretionary portfolio management solutions,

we are making you supposed more active content for the more strategic

long term exposures, and more passive content for tactical changes.

>> Okay.

So you know that academic research generally shows

that active managers do not perform,

how should we say, how should we put this, diplomatically?

The evidence shows that over the long run,

there are few active managers who actually outperform.

So what do you do with this kind of evidence?

>> It's true.

Reality is that about two-thirds of traditional fixed income or

equity managers, do not beat their benchmarks in the long run of the costs.

So also from this perspective- >> How about before costs?

>> Before costs obviously it looks better >> Okay.

>> Because they charge something for dilating.

>> Okay, so maybe it means that active managers are a bit expensive.

>> That could be an argumentation, yeah.

So from that respective, that we have just one-third in the long run who beat

benchmarks of the costs, I think it makes sense to combine both in a portfolio,

because on the one hand sides, you can optimize your hit ratio of basically

selecting an active manager who beats- >> How do you define a hit ratio?

>> Hit ratio basically being that you are able to pick someone

who outperforms the benchmark in the long run.

And the other argumentation is about fees, you can control the overall

costs of your portfolio, if you also combine active and passive.

>> Okay.

So in your view, in which type of market or

asset class does active management make more sense?

>> If we analyze industry or consultancy data,

starting on the equity side, there is evidence that

active management works better in areas which are less efficient.

So that's quite natural I think from an understanding.

>> Right, specifically, not the US, for instance.

>> Asian emerging markets, small/mid caps, or

some specialist area such as reads or health care sector.

>> Reads being real estate?

>> Reads being real estate securities, for example.

>> Okay.

>> Active management can work in other areas, as well.

European, US equities, etc.

But is much more cyclical, and

is much more dependent on the prevailing market structure, the market environment,

such as the market breadth, correlations, or return dispersions.

So how big the opportunity set is for an active manager, or

how narrow the opportunity set is.

>> Okay.

And so, in what areas would passive management make more sense?

>> Again, I think on the equity side it's about markets which are very concentrated.

Dominated by a handful of stocks or a sector or a seam.

Practical examples, the Swiss equity market, it is dominated by

three large cap high quality stocks, so that's difficult to beat.

You have markets such as Australia, Russia,

Canada which are dominated by banks and energy companies.

So that's also quite difficult on the fixed income sides.

You could argue the four big government bond markets Japan,

UK, US, and Germany are deep and liquid i.e., difficult to beat basically.

Even though, speaking about sovereign bond markets these days,

if you have the European sovereign bond market for example,

70% of sovereign bond yields are negative as of today.

So that brings up the question is passive really an intelligent way to invest in.

>> Right, right, right.

Well, talking about bond markets, how do you deal with this fact,

which personally does not make me very much at ease,

that if you invest through a passive fund,

then you will allocate more money to a country which

gains weight in the index because its debt arises.

So for instance, if Greece increases its public debt,

its weight in the index will increase and therefore more

money will be allocated to a country that has problems.

>> Yeah, I think that's a very fair argument.

And could basically speak of that you should taken an alternative

route of constructing a portfolio.

>> There are more different type of industries that would adjust for

this kind type of problem.

>> Yes.

I think the stance on the equity side,

how typically standard equity benchmarks are constructed, are market cap weighted,

is maybe a more natural one because you basically have the situation that if

a company's successful and gets bigger, the weight in an index is bigger.

And you can see that as kind of a momentum strategy,

which in the long run is quite successful one.

>> Right, right, right.

When you talk about the Swiss equity market,

you say they're dominated by three companies, and these are high-quality

companies in the consumer non-cyclical, we're talking about Nestle,

or the pharmaceutical, we talk about rush of an artist.

So these are typical stocks which would not suddenly face a bubble in their

valuation, but this might not be the case if you have an index which is

dominated by say, a telecom company or a technology company.

I remember the case, and it's been illustrated here in this course,

when Nokia used to be 70% of its domestic market Finland,

but also with the largest weight in the MSCI Europe, the European equity index.

And then, at some point, during the bubble, the tech bubble in 2008, inflated

to something like more than 100 times earnings.

So if you buy an index, then you will be driven to allocate

more money to a stock, to a company which is dominating and

is completely inflated in terms of evaluation, how do you adjust for that.

>> I mean, it’s correct that's the Nestle, the rush of an artist of this world or

high quality company and basically investing in high quality companies,

is in the long run a winning strategy.

Those firms are have caught organic growth,

they have high returns on invested capitals.

They have not so much leverage.

Those stocks are typically good investments in the long run.

Nevertheless, I think there's always a price for something you pay.

So basically the combination of value and quality is even a better strategy.

>> Okay, thank you, David.

[MUSIC]

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