What is the Future of Active Management ?

By Meryem Douhour, Multi-Asset and Quant solutions at AXA Investment Managers

The future of active management is marked by innovation, discretionary decision-making aided by quantitative techniques, advanced risk management and the integration of ESG. Active managers are basing their offer on these elements to provide enhanced performance combined with risk control. By keeping pace with modern portfolio management tools, active managers can add value to diversified portfolios and deliver robust returns in an increasingly challenging financial landscape.

Active management is especially complex for multi-asset portfolios. It requires a deep understanding of the economics of individual asset classes and their interdependence as well as the ability to make dynamic allocation decisions based on market conditions and the investor’s risk appetite.

Diversification is the cornerstone of active management of multi-asset portfolios. The future involves a greater emphasis on optimizing diversification in portfolios. To this end, building allocations with different asset classes is essential to maximize the expected risk-adjusted return while reducing extreme losses. By combining a range of core, alternatives, sector assets and derivatives, fund managers can achieve an optimal balance, delivering attractive returns while limiting risk, thereby strengthening the resilience of portfolios to market fluctuations. The approach is dynamic and involves continual reassessment of factors and correlations leading to adjustment of allocations to maximize diversification benefits and minimize risks.

This graph is for illustrative purpose only. It is produced using a proprietary AXA IM model, capable of simulating a large set economic scenarios for various asset classes based on long-term economic assumptions. We exhibit here the benefit of diversification when alternative assets are combined with a diversified universe versus a simple allocation with equities and fixed income.

Risk management remains a priority in active management. It starts by including the investor’s risk aversion when calibrating and constructing a strategic asset allocation. Advanced risk models are used to identify potential pitfalls and to implement strategies that protect portfolios during market downturns. Risk management may involve tactical asset allocation and alternative investments to protect against drawdowns. Using derivative overlays in a dynamic risk management setting can help reduce even further the negative impacts of adverse market conditions.

For institutional and insurance clients, active management involves a profound understanding of constraints and needs resulting in tailor-made allocation and risk management. As an active manager, offering customized solutions that align with investors’ performance and risk objectives is essential. Considering the clients liabilities and income distribution needs within portfolio design enables active managers to optimize performance while creating a unique value proposition.

Over the past decade, ESG factors have become a fundamental component in asset management and is a top priority for AXA IM. ESG integration and impact investing in multi-asset portfolios are central to our approach. Active management is by nature dynamic and positioned as a preferred approach for creating impact funds. This allows for continuous and sustained management to ensure real impact. In this way, ESG is a compass, guiding investment decisions to align financial objectives with sustainability and providing investors with a proactive avenue to support responsible business practices and contribute positively to society and environment.

Factor-based investing is also a trend shaping active management, with factors like value, growth and quality representing specific characteristics that drive asset returns. Using these factors in a diversified portfolio can improve performance since they are selected to outperform in each market environment. In multi-asset portfolio management, factor-based approaches can improve diversification and risk management benefits.

Staying agile, innovative, and client focused is key in an evolving investment landscape. While traditional models face challenges, we are embracing new strategies and technologies to remain a leading actor.