Amid a new cycle of market volatility caused by U.S. tariffs, institutional investors are facing a dilemma when selecting active or passive management strategies for their public equities portfolios, says John Wilson, founding principal, co-chief executive officer and managing partner at Ninepoint Partners LP.
“People are looking for strategies that offer lower correlation to give them that protection from volatility,” he says.
Active management strategies are advancing in response to the impact from the tariff policy, which includes added inflation risks. Active strategies, he adds, can give institutional investors more control to mitigate risk in equities and other markets like fixed income or treasury yields.
This change in thinking is more evident in the U.S. equity market, Wilson says, noting a variety of investors became complacent with the remarkable performance from U.S. equities in recent years.
“[For] U.S. equity markets — compounding at 15 per cent a year and it’s the biggest, most liquid market in the world — passive strategies have a lot of attraction for people.”
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But, in a world with increasing uncertainty, he adds, there’s going to be more demand for active management strategies. “I think that’s the trend you’re going to see continuing to get a lot more attention.”
August Cruikshanks, a principal in the investment consulting practice at Eckler Ltd., says a concentration in the U.S. equity market, becoming about 70 per cent of the index, is making it difficult for global equity active managers to outperform.
“As can be expected in this environment where active management is being more challenged, we’re seeing some incremental shifts to the use of passive management in our client portfolios.”
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However, most of his plan sponsors clients still count with an active mandate for various equities portfolios due to the historical ability to add value.
“When we think about the global equity exposure, . . . there’s a passive allocation to U.S. equities that some of our clients are looking to use more often now that’s paired with an active allocation to the rest of the developed world through international equities. There’s a bit of a trend here.”
According to research from the Wharton School of the University of Pennsylvania, passive strategies are attractive to investors because of lower investment fees and transparency benefits when looking at stocks or bonds an indexed investment vehicle holds.
Conversely, active management gives investors more flexibility, the ability to hedge and additional risk management control options.
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Erwan Pirou, Aon’s chief investment officer for Canada, says the firm doesn’t restrict active managers between regions, choosing to open up the entire global equity landscape instead of having geographical restrictions.
“We’ve preferred to let managers have discretion and also look at the stock specific basis, . . . compare stocks across region and invest where it makes the most sense.”
Among Aon’s Canadian institutional investor clients, most rely on an active strategy with a select few going for a passive management style. Those that pick passive strategies, he notes, typically do so to prevent any volatility or a tracking error from active management.
“We’re a strong believer in active, not having a regional approach and not having kind of a mixture of active and passive.”
Read: Institutional investors turning to diversified portfolios to manage tariff volatility: expert