Еfficiency of active and passive approaches to investment portfolio management

Baranova Viktoriia
Doctor of Economics, Professor, Head of Financial Management and Stock Market Department, Odessa National Economic University, Ukraine, e-mail: vgbaranova58@gmail.com, ORCID ID: https://orcid.org/0000-0002-1724-957X

Ivanov Illia
Postgraduate Student of Financial Management and Stock Market Department, Odessa National Economic University, Ukraine, e-mail: laeda.29@gmail.com, ORCID ID: https://orcid.org/0000-0003-3998-8098

Cite this article:

Baranova, V., Ivanov, I. (2023). Еfficiency of active and passive approaches to investment portfolio management [Efektyvnist aktyvnoho ta pasyvnoho pidkhodiv do upravlinnia investytsiinym portfelem], Socio-economic research bulletin, Vìsnik socìal’no-ekonomìčnih doslìdžen’ (ISSN 2313-4569), Odessa National Economic University, Odessa, No. 3-4 (86-87), pp. 77-87.

Abstract

The article investigates the issues of applying active and passive approaches to investment portfolio management. It is determined that the essence of investment portfolio management depends on the object of management, which influences of the concept interpretation. Differences between active and passive approaches to investment portfolio management are outlined. Recent research on the effectiveness of applying an active approach and statistics of US active management funds are analyzed, leading to the conclusion that active funds in the US stock market are unable to consistently outperform the benchmark in terms of returns, especially in the long term, providing a basis to argue that the passive approach is capable of generating higher long-term returns. It is identified that the inability to exploit market inefficiencies may be one of the reasons why active funds fail to achieve higher returns. Adding to the ongoing debates in the scientific community regarding the relative efficiency of both approaches, the performance of the all-weather portfolio, reflecting a passive approach to management, is analyzed, revealing that without proper management, a passively managed all-weather portfolio failed to demonstrate better investment efficiency than the conventional stock index, aligning with arguments in favor of the active approach. This result highlights the importance of proper management and adaptation, even in passive strategies, for achieving the best possible results. Based on the results of the study, the advantages and disadvantages of both approaches are highlighted and it was concluded that for effective investment portfolio management, it is necessary to incorporate components of both approaches, such as asset allocation (a component of the passive approach) and security selection (a component of the active approach). Suggestions for further research directions are formulated, which is focusing on the development of an asset allocation system that can offer optimal results in different market conditions.

Keywords

investment portfolio management; active approach; passive approach; efficiency; returns; investment funds.

JEL classification:G140; G150; DOI:https://doi.org/10.33987/vsed.3-4(86-87).2023.77-87

UD classification: 336.76:005.3

This work is licensed under a Creative Commons Attribution 4.0 International License. To view a copy of this license, visit http://creativecommons.org/licenses/by/4.0/

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