According to a new report from Momentum Global Investment Management, this finding shows asset allocation is still paramount when choosing investment strategies because the value added by active managers varies widely from market to market.
The report, released in conjunction with Scorpio Partnership, revealed 50% of wealth managers had introduced a passive solution for their clients’ portfolios in the past three years.
But while passive strategies can be very useful in some sectors or asset classes, Momentum argued they should not automatically be viewed as attractive because of the low fees associated.
Between 1993 and 2011 the alpha added by active managers in US government bond funds was limited with 90% of the group underperforming, Momentum said.
This is because the efficiency of the market is high and so information is reflected in prices quickly and it is harder to gain an upper hand through doing research.
At the other end of the spectrum, during the same time period, 78% of active managers contributed alpha to their US small cap funds.
Momentum explained the US small cap equity space has thousands of companies with relatively few investors scrutinising them and so research can result in more fruitful returns.
Christopher Mahon, head of investment strategy at Momentum, said: "The same is true in the UK, with the exception that in the US the small cap market is substantially bigger (much more so than the relative GDPs would suggest).
"But there are still the same sorts of trends and if you were to look at the UK government bond market it would be just as efficient."
A further section of the report looks at niche areas, such as credit and commodities, which passive solutions can find difficult to replicate leading to mounting costs.
Mahon said: "The key theme we are trying to get through is that investors and advisers should not be fooled into thinking passive is something they can sit back and invest in without doing any research."
But he also recommends wealth managers pick the areas they research carefully, avoiding spending too much time on mainstream asset classes which passive strategies can easily replicate and concentrating instead on more niche or specialist areas.
