Active vs. passive investments: Insights from industry professionals

By Dan Kern

Debate over the merits of active vs. passive investment strategies continues across the asset management landscape. In a recent webinar, Nixon Peabody Trust Company’s Daniel Kern joins leading professionals from Bloomberg, BBPM Life Insurance, Robeco, and Edmond de Rothschild Asset Management to discuss their perspectives on how these strategies are evolving, the impact of market trends, and the role of technology in portfolio management.

The growth of passive investing and its implications

Passive investing, particularly through ETFs and index funds, has seen significant growth in recent years. This trend is reshaping the role of active managers, many of whom are now prioritizing other areas where they can add value. Panelists noted that while passive strategies are cost-effective and efficient for core portfolio allocations, active management remains vital to less efficient markets such as small caps, high yield, and emerging markets, where the potential for alpha is higher.

Balancing cost and value: The core-satellite approach

Panelists pointed out the importance of balancing cost efficiency with the pursuit of outperformance. Many experts advocate for a “core-satellite approach,” where the core of a portfolio is built with low-cost passive investments, and satellite positions are allocated to active strategies targeting specific opportunities. This structure allows investors to keep overall costs low while simultaneously seeking greater returns in areas where active management has a higher likelihood of success.

Market concentration and the risks of passive investing

The panelists expressed concerns about increasing market concentration, particularly in major indices dominated by a handful of large-cap stocks. This concentration may magnify risks for investors, as passive funds typically allocate more capital to the largest companies, potentially leading to outsized exposure. Conversely, active managers have the agility to identify inflection points and avoid overexposed sectors, which can provide an advantage during market downturns or periods of volatility.

The role of AI and technology in investment management

Technology, especially artificial intelligence, can inform both active and passive strategies. While AI can enhance data analysis and improve efficiency, human judgment remains essential, particularly in interpreting data, addressing client concerns, and making investment decisions. AI is seen as a tool to augment, rather than replace, the expertise of portfolio managers.

A place for both strategies

The panelists reiterated that active and passive strategies are not mutually exclusive and can complement each other within a properly composed portfolio. The key is to understand where each approach can bring the most value, keep an eye on costs, and stay vigilant about risks such as market concentration. As the investment landscape continues to evolve, a flexible, informed approach is critical for long-term success.

Daniel Kern
Chief Investment Officer
Office: +1 617.345.1044
dkern@nixonpeabody.com