Mutual funds

Active funds: how can they outperform ETFs today?

Posted by MoneyController on 29.03.2024

Looking at some of the data (e.g. Morningstar fund inflows), it is clear that passive funds have become increasingly popular with investors in recent years. But what are the strengths of actively managed funds?

Two advantages of ETFs: cost and transparency

As Monika Calay, head of passive strategies research at Morningstar, explains in an interview with Sunniva Kolostyak on the same portal. Calay mentions cost as the first reason, as passive funds are known to replicate market indices and thus minimise management costs. Another aspect Calay mentions in favour of passive funds is the transparency of performance data.

Active funds and the growth and large-cap segments

However, active management can have some advantages over passive funds. In the case of global equity income, for example, Calay explains that passive funds are structurally more oriented towards the value and small-cap segments. Active funds, on the other hand, have been able to exploit their flexibility by allocating more resources to the growth and large-cap segments, benefiting from the outperformance recorded in this area.

Emerging markets

In emerging markets, less than half of active funds have managed to outperform market indices, so it is not always the case, says Calay, that active funds always have an advantage in less than fully efficient market conditions (such as emerging markets). Nevertheless, active funds have recently regained ground, even in the face of changes in monetary policy and in some economies: for example, Calay explains, they have been more cautious in the Chinese market and more willing to invest in countries such as Brazil.    

Bond markets

In the bond market, there are two strengths that active managers can capitalise on: a) calibrating their strategies according to the evolution of interest rates, which are currently volatile, and b) carefully selecting the credits to be included in the portfolio (as Calay explains, in 2023, for example, active managers successfully invested in investment-grade credits).

Read also:

Mutual funds – what are they?

What are ETFs and how do they work?

What are the main management styles with regard to the benchmark?

What are the main styles of portfolio management? Growth and value

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