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Aon Retirement and Investment Blog

Debating Active vs. Passive

The debate about active versus passive management is an incredibly polarizing topic, with many well informed experts passionately holding views on opposite extremes. Why is this? We believe much of the public narrative on this topic is one-sided or incomplete. Depending on their perspectives (or financial incentives), people often focus on only one side of the debate and ignore the other. Some people have grown so dogmatic that they fail to listen to valid points from the other side. With all the varying research and statements made by professionals, what should investors believe?

We believe the statements people make are often half-truths, in that they are valid perspectives, but not the complete story. They can mislead people at the same time as inform them. Both sides of this debate tell such half-truths.

We seek to bring order to this debate by laying out the research on both sides, and describing how we develop recommendations for our clients. We do not see a one-size-fits-all solution. Some investors are well positioned to be successful with certain types of active management, while others are likely to perform best with passive. Hopefully, our recent white paper will help investors understand what is most appropriate for their portfolios.

Key Points from Our Recent White Paper

The active versus passive management debate is both nuanced and rich. There are good reasons why this is a hotly-debated topic, and reasonable people fall on both ends of the spectrum. It is unfortunate that often this debate is summarized with half-truths and sound bites.

This paper summarizes and clarifies our views on the debate on active versus passive, shining light on the multi-faceted issues to provide institutional investors with an actionable way forward. Our views are not rigid or ideological: they are based on research, the details of which are contained in several other papers cited throughout this piece. We believe some investors are well-suited for active management, while others are likely to perform best with passive or factor-based investments. Suitability will vary based on both investor circumstance and asset class.

While we acknowledge the average active manager is likely to underperform after fees, we also believe that actively managed, long-only public equities are likely to add value for skilled investors willing to employ broad, high-conviction mandates (such as unconstrained global equities) and stick with them over the long-term. However, these characteristics can be challenging to maintain, so most of the world’s investors are better off investing equities passively or using low-cost factor-based strategies.

Active management in fixed income has higher odds of success than equities, especially for broad, multi-sector mandates. Investors may be able to achieve some of the same returns as active management simply by using customized blends of the broad market. Passive mandates may make sense for those needing a high level of simplicity or liquidity.

Beyond public equities and fixed income, each strategy has its own unique considerations. The details of other strategies are beyond the scope of this paper.

For more information, please see our full white paper here.

Eric Friedman is a Partner and U.S. Director of Content Development on Aon’s investment consulting group, and he is based in Chicago.

Content prepared for U.S. subscribers, but available to interested subscribers of other regions.

The information contained above should be regarded as general information only. That is, your personal objectives, needs or financial situation were not taken into account when preparing this information. Accordingly, you should consider the appropriateness of acting on this information, particularly in the context of your own objectives, financial situation and needs. Nothing in this document should be treated as an authoritative statement of the law on any particular issue or specific case. Use of, or reliance upon any information in this post is at your sole discretion. It should not be construed as legal, tax or investment advice. Please consult with your independent professional for any such advice. The information contained within this blog is given as of the date indicated and does not intend to give information as of any other date. The delivery at any time shall not, under any circumstances, create any implication that there has been a change in the information since the date of publication, or any obligation to update or provide amendments after the original publication date. The blog content is intended for professional investors only.

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