20180531-NATIXIS-What_happens_when_there_is_longer_any_active_management__5页_714kb

Flash Economics Summary

Core Content

This document explores the implications of the decline or disappearance of active management in equity portfolios, focusing on the role of active management in providing forward-looking insights and how its absence could affect financial markets.

Main Management Styles

There are three primary management styles for equity portfolios:

• Active Management: Managers construct portfolios based on their expectations of company performance, which is forward-looking.
• Index-Based (Benchmarked) Management: Managers replicate an equity index, such as ETFs, which is considered backward-looking.
• Systematic Management: This involves non-discretionary rules, such as high-frequency trading (HFT) or factor-based investing (e.g., Fama-French factors like market, size, value, momentum, quality).

The share of active management in financial markets is declining relative to the other two styles.

Implications of Active Management Disappearance

1. Loss of Informational Content in Share Prices
   If active management disappears, share prices will no longer reflect forward-looking expectations of company performance. Instead, they will become backward-looking, leading to a loss of informational content. This can result in large price revisions and frequent trend reversals when new information is revealed.

2. Increased Share Price Volatility
   With all investors adopting the same passive management approach, herd behavior will increase. This uniformity in portfolio composition can lead to higher volatility as all investors react similarly to market changes.

3. Decreased Trading Activity
   In the absence of diverse opinions, there will be minimal trading activity. Passive managers will all have the same view on the market, reducing the diversity of trading strategies and leading to lower market liquidity.

Key Findings

• The disappearance of active management would significantly alter the dynamics of financial markets.
• Share prices would lose their ability to forecast future company performance, leading to instability.
• Market volatility and trading volumes would be affected, with both expected to decline or increase depending on the context.
• It is emphasized that active management is essential for maintaining market efficiency and providing diverse perspectives.

Conclusion

The document concludes that a sufficient number of active managers is necessary to maintain the informational content of share prices, manage volatility, and ensure adequate trading activity in equity markets. Without active management, the market risks losing its ability to efficiently reflect future expectations, leading to potential instability and reduced liquidity.

Disclaimer

The document is intended for professional and qualified investors only and is strictly confidential. It is not a personalized investment recommendation and does not constitute financial analysis. It is based on public information and may include results from quantitative models, which are not guarantees of future performance. Natixis and its affiliates are not liable for any errors or omissions in the document. The views expressed are those of the authors and do not necessarily reflect the views of Natixis or its subsidiaries. The document is subject to legal restrictions in various jurisdictions and should not be distributed to unauthorized parties.