0:00
[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?
0:54
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?
1:23
>> 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?
2:22
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.
2:46
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?
3:24
>> 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.
4:01
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.
4:29
>> 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?
5:16
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.
5:57
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,
7:29
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.
9:26
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]
University of Geneva- Tony BerradaSFI Associate Professor of Finance
University of Geneva- Ines ChaiebSFI Associate Professor of Finance
University of Geneva- Jonas DemaurexTeaching Assistant
University of Geneva- Rajna Gibson BrandonSFI Senior Chaired Professor of Finance and Managing Director of the GFRI
University of Geneva- Michel GirardinLecturer in Macro-Finance - Project Leader for the "Investment Management" specialization
University of Geneva- Philipp KruegerSFI Assistant Professor of Finance
University of Geneva- Kerstin PreuschoffAssociate Professor of Neurofinance and Neuroeconomics
University of Geneva- Olivier ScailletSFI Senior Chaired Professor of Finance and Vice-dean (research) at GSEM
University of Geneva- Philip ValtaSFI Assistant Professor of Finance
