The Financial Times, Markets Insight Opinion, excerpt January 24, 2023

Mohamed El-Erian — Why Passive Investing Makes Less Sense in the Current Environment

Monetary policy regime change has led to a new and complex set of investment risks, suggesting that investors are better served by active investment strategies.

…Passive portfolio management is particularly attractive in a world where investment outcomes are heavily influenced by a common global factor. This was the case for more than a decade as the combination of artificially floored interest rates and massive injections of central bank liquidity boosted virtually all assets. Even zombie companies and fragile sovereigns could refinance without much difficulty or internal reforms.

Positive correlations within and across asset classes hit unusually high levels. The generation of high returns and lower volatility did not seem to require a lot of individual investment selection, making passive approaches much more attractive, especially given their lower fees relative to active management.

…In short, this is an investment world in which greater selectivity, smart structuring and dynamic asset allocation trump more often the lower fees on passive vehicles. It is a world that warrants a partial return to à la carte selection after many years of widespread fixed menus.