As active/passive investment tides turn, FinTech is key to success

Active passive

Current market volatility is ushering in a resurgence in active fund management, while asset owners are demanding more digital-driven access and transparency. To achieve the necessary active/passive balance and meet investors’ demands, new FinTech tools are a must.

Active vs. passive assets: shifting tides

In the past 10 years, passive fund assets (including exchange-traded funds [ETFs]) have grown to more than $10 trillion global assets under management (AUM) and inflows have rapidly outpaced growth in active fund assets. Active funds are far from dead, of course – although their AUM have declined, thanks to their higher fee structure they can still pull in substantial revenues. Even many of the large asset managers (AMs) who construct index funds alongside active funds depend to a considerable extent on active revenues.

Nevertheless, at the end of 2019 passive inflows surpassed active ones, and only market volatility could stem that tide. For the past decade active managers have been fighting low volatility in a continued bull market, with little room for active AMs to eke out any alpha across the market.

Recent volatility in financial markets, however, during which the VIX* reached 80, have generated active fund returns that have helped to increase inflows back into active management strategies. In Q2/3 2020, active managers have posted returns that have outperformed index benchmarks, resulting in a shift in the active/passive tide.

A blend is best

In the changing environment, active managers are holding firm. Their solid fundamental research is uncovering undervalued companies, growth companies, and unique market sectors with portfolio risk/return valuations that are generating superior returns, especially in volatile times.

The upturn in market volatility has also enabled fundamental funds to produce superior alpha compared with index funds. And crucially, as factor models have proliferated, it’s understood that portfolio allocation is not necessarily all passive or active, but can be a blend of the two: achieving beta from efficient passive strategies and targeting alpha with active ones. Multi-factor models simply add to the growing range of choices AMs have.

A demand for more transparency  

Meanwhile, yet more changes are shaping the market and its participants. Asset owners are now demanding that their AMs provide them with digital access to their funds. Institutional investors want full transparency throughout the investment lifecycle, and both active and passive fund managers must provide proof of auditable performance, tracking errors and proof of adherence to the AMs’ stated investment policies. Spurious returns, even positive ones, are unwelcome.

What’s more, sophisticated asset owners want to be able to follow, digitally, portfolio construction, P&L attribution, fee transparency and allocation, and portfolio management, while also benefiting from all efficiency gains. Consequently, digital analysis and reporting are a must when presenting to the investment policy committee.

In a super-competitive investment market, AMs must be able to prove to their clients, statistically, their performance, efficiency and reliability. And today this must be done digitally – pdf reports and unknown performance factors are no longer welcome, and only full transparency will persist. All of these goals can only be achieved with the right mix of technical tools.

Expertise is vital, but the right tech is essential

The crux here is technology. Whether we are considering AMs supplying index funds or smart beta/factor-based funds, or active managers targeting undervalued assets, across the board the right technology for research, analytics, portfolio construction, tracking and client reporting is the right way to execute on a strategy and communicate your worth to investors.  

AMs, whether passive or active, face extreme competition. Many will have to reengineer their front-to-back investment operations, not only to enhance front-end decision support (with research, portfolio construction, risk and analytics), but also to gain cost and operational efficiencies throughout the whole investment lifecycle.

But an efficient investment lifecycle cannot always be achieved internally. Technology choices range from in-house, cloud or managed services to fully outsourced solutions, depending on assets being traded, investment expansion and position in the client stack. In Table 1, we summarize some of the key tools that firms can use to differentiate themselves in this new environment.

Table 1: Key technological enablers and differentiators for asset managers (AMs)

AM tool/function

AM business benefit

Performance attribution

To prove their worth quantitatively, active AMs need to highlight their performance in a transparent, trustworthy and accountable manner. Asset owners will demand to see the proof.

Index tracking

Similarly, passive funds must minimize tracking error, efficiently reallocate to index modifications, and optimize underlying indices through ETFs, derivatives and component allocation.

Transaction cost analysis

Optimizing buy-side trading costs directly adds to performance returns. Increasingly, the interrelationship between the AM’s trading desks and portfolio managers is another contributor to performance return. A few basis points saved in trading contribute to overall portfolio performance, and can be a competitive differentiator.


The foundation for the above is clean, consistent, normalized and timely data. IBOR continues to advance the destruction of silos and point-to-point solutions – all in the name of efficiency.

AI/ML***/Big Data

Core systems must provide a solid technology foundation throughout the enterprise, but the continued development of Big Data and AI/ML tools can enhance an AM’s toolkit. While many of these tools may not yet be widely in use, they should be watched. 

Research management solutions

There can sometimes be more than 200 reports per security, with filings, social media, notes and vetting all contributing. Efficient organizational recall can now be obtained with current technology – the use of natural language processing (NLP) is already a reality in this space.

Robotic process automation (RPA)

Automated straight-through processing. RPA can eliminate repetitive manual operations while minimizing operational risk and costs – again, this is now a reality.

Source: Chartis Research

A digital future

The COVID-19 pandemic has catalyzed economic uncertainty, and market volatility is likely to continue into the foreseeable future. By leveraging this volatility, active fund management has been able to stem the tide of fund outflows and attract investors by producing market alpha.

In this new era of ongoing investing, old ways of thinking – that fund managers can avoid having to prove to investors quantitatively how a fund attains its returns – are history. Those fund managers that will survive and thrive in the new market environment are upgrading their technology, not only to optimize efficiency and performance and reduce risk, but also to communicate to investors with full transparency. In this day and age that means going digital – by leveraging a range of FinTech and other tools now at their disposal.

Further reading

As part of its research, Chartis is examining the ongoing importance and relevance of buy-side investment management issues, alongside firms’ pain points and the huge technology choices to be made across the entire investment lifecycle. Future Chartis research will address all of the above technical considerations and market solutions, in quadrant reports, thought leadership research and advisory work.

(2019, Chartis)

(2020, Chartis)

(2018, Chartis)

(2020, WatersTechnology)

*The Chicago Board Options Exchange's CBOE Volatility Index is a measure of expected volatility in stock markets.

**Investment Book of Record/representational state transfer application programming interfaces.

***Artificial intelligence/machine learning.


Points of View are short articles in which members of the Chartis team express their opinions on relevant topics in the risk technology marketplace. Chartis is a trading name of Infopro Digital Services Limited, whose branded publications consist of the opinions of its research analysts and should not be construed as advice.

If you have any comments or queries on Chartis Points of View, you can email the individual author, or email Chartis at [email protected].

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