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Passive investments such as exchange-traded funds (ETFs) have become increasingly widespread, as they are simple and cost-effective. However, this does not mean that active portfolio managers have had their day. “Every market calls for different strategies. The solution, therefore, does not lie in choosing between active and passive, but in combining the two,” says Swen Köster, Head of Sales, Asset Management Solutions, at Moventum AM.

Global capital markets have undergone a fundamental transformation. ETFs are now the norm, with a global market capitalisation of around 20 trillion US dollars. “Broad markets are becoming increasingly efficient, meaning that active managers’ information advantages are becoming rarer,” explains Köster. At the same time, costs are a key factor in returns. This makes ETFs particularly attractive in liquid, widely traded markets, where fund managers find it difficult to generate excess returns – here, every cost factor counts when it comes to returns.

However, there are also markets that tend to be less efficient, with more frequent mispricing, such as emerging markets, small-cap shares or niche bonds. Here, active managers can create genuine added value through research and selection, as a passive ETF tracks the index ‘blindly’ and therefore also holds the poor-performing securities.

One way of implementing this approach is through fund of funds, which take into account both active funds and ETFs depending on the market environment: in efficient markets such as large caps, low-cost ETFs can be a sensible addition, whereas in inefficient markets such as emerging markets or small caps, active funds are often used – where active management can offer the potential for additional value. “This gives investors the best of both worlds,” says Köster.