Passive managers spark space race with launch of new satellites
Mar 13th, 2008 | Filed under: Portable Alpha & Alpha/Beta SeparationYesterday, we mentioned an unreleased academic study that measured the aggregate “cost of active management” in US equity markets. We concluded with remarks from one particularly staunch proponent of efficient markets. But even he left the door open for active management (presumably where markets were less efficient).
Assembling such an active/passive portfolio lies at the heart of alpha/beta separation. But since the term “alpha beta separation” conjures up memories of high school math club, marketers of asset management services have coined the term “core/satellite” investing (where “core”=passive and “satellite”=active). What’s striking is that, rather than being ridiculed by traditional passive managers, core satellite is being embraced by them.
For example, this brochure from Barclays (iShares) is subtitled “creating harmony between index and active strategies”. It says:
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Asset management has been moving away from constrained and closet indexing. Investors that go for the passive indexing route leave money on the table and the best of the brave ones that go for active should be successful, if at least only some of the time.
In other words, it may be possible that the increasing polarisation of investing (unconstrained active and passive indexing) could generate more inefficiencies. This is on top of the creation of new markets in emerging countries that are still relatively inefficient.