The Covid-19 pandemic has been more favourable for active investment strategies, according to RBC Wealth Management’s Maryia Semianchova, as social distancing and targeted support have supported stockpicking approaches. 
Semianchova, director for global manager research at RBC Wealth Management, said the Covid-19 downturn had been very different from a ‘typical’ cyclical downturn, where key indicators and policy playbooks are well understood.
During the pandemic, performance has been determined by the impact of social distancing rules and rescue and stimulus measures, she said, and as such bottom-up analysis and stress testing has become more important than sector and style categorisation.
She said: “There is a very valid argument that such issues are only temporary, and long-term investors should continue to focus on the long-term growth prospects.
“However, those prospects may never materialise if a company is unable to survive the next six months, and this likelihood of survival is not something a passive strategy can credibly evaluate.
“In this case, active management can help cushion the downside in a prolonged downturn by shielding investor portfolios from some of the worst outcomes.”
Semianchova said periods of disruption are generally favourable for active management so long as they stay adaptable and are not “wed to outdated frameworks, such as modelling the outcomes of the current crisis on those of previous ones”
She explained: “Navigating a road with the false confidence of an old map is even more dangerous than with no map at all.”
Nevertheless, flows have continued into passive strategies during 2020 despite the pandemic, with the Investment Association recording £12.9bn in net inflows to tracker funds during the first nine months of the year.
Source: FE Analytics
Semianchova noted that the long-term trend towards passive strategies is unlikely to be reversed, particularly as financial markets settle in as a vaccine becomes available.
She continued: “New alternative data sets prompted by the pandemic will make their way into passive rule-based strategies, erasing any competitive advantage gained by early adopters.
“Meanwhile, investor focus on costs, competition among providers and research advances should continue to support passive strategies.”
Passive flows will likely continue to create inefficiencies in markets and make active stockpickers’ jobs worthwhile, she added.
Indeed, Semianchova said the relationship between active and passive during the crisis has remained symbiotic with different investor categories trading for different reasons, helping to keep markets liquid.
But Semianchova said there may be further changes in the passive industry which may have to become more sophisticated and cheaper to survive.
It also remains to be seen whether active managers will grasp the opportunity with both hands.
“Wary of ‘overpriced’ stocks, many fund managers stayed away from mega-cap technology names and bond-like consumer staples while these continued to lead the market, despite somewhat stretched valuations,” she said.
“In their defence, active managers often cited their willingness to forego relative returns for the sake of downside protection, an argument that many investors found less and less compelling as the rally continued.
Semianchova added: “A ‘good’ crisis is what was needed to restore faith in active management, and some managers who failed this test will find their investor’s patience running out.”
A new trend that could emerge is the blending of active and passive investing, something which Semianchova said has been “many years in the making”.
“Many such combination strategies had a setback in the aftermath of Covid-19 outbreak as signals developed on the basis of historic relationships naturally failed to predict market drivers in the current environment,” she explained.
“However, the industry is evolving quickly, and new data sets are already making their way to the market.”