Corentin Scavée
09 Apr 2024
Despite the market downturn in 2022, the index approach has remained efficient
After a first half marked by a general decline in the markets, the index approach continues to show superior performance to that of the other Belgian players analyzed for aggressive risk profiles. Passive management once again demonstrates its relevance, including in a bearish context. In the long term, it seems unbeatable.
The index approach more efficient for equity portfolios
For portfolios made up mostly of equities, the index approach emerges as the best over almost all the periods analyzed (1, 3, 5 and 10 years). And in the long term, this approach seems the most efficient whatever the investment profile.
Active management no better in times of crisis
The observation is instructive: even in periods of decline, active management does not seem to allow the aggressive investor to generate better returns or limit his loss. The additional cost of this type of management compared to passive management, justified in theory by greater latitude left to the manager to protect their clients' portfolios, seems futile.
No reason to speak of a "crash"
As unpleasant as it is, the current drop is not abnormal. Current variations of around 15% are acceptable on the stock market and should not unduly worry the long-term investor. For comparison, in 2020, the COVID crisis had caused the global equity index to fall by 35% in less than two months.
An unprecedented period in the markets
However, it is important to specify that the current period is marked by quite exceptional events on the markets: meteoric inflation (+8% compared to the same period last year) and rate hikes announced which are just as impressive – between +1% and +2 % predicted by central banks by the end of the summer. A rate hike of this magnitude, combined with such a high level of inflation, had not been seen since the early 1980s. As a result, the market reaction is also very strong and affects all asset classes, particularly bonds whose value moves in the opposite direction of interest rates.
Bond portfolios strongly impacted in the short term
We observe a poor performance of index portfolios with a large proportion of bonds over the first six months of the year. This is explained by the fact that in the index-based approach, the average maturity of the bonds (10 years) is about twice as long as in comparable funds (5 years), which generates sensitivity to interest rate variations that is twice as high. In the long term, however, a long maturity os supposed to offer a higher yield. This seems to be confirmed since the cautious index portfolios remain, compared to the funds of the other players examined, the most interesting over all the other investment horizons analyzed (3, 5 and 10 years).
After the fall, the rebound?
Finally, it is good to remember that on the stock market, periods of decline are generally followed by the best periods of growth. To take the example of the COVID crisis in 2020, after a 35% drop between February and March, the global equity index finally closed the year with a total increase of 13%! Rationally, low periods such as the one we are currently experiencing generally constitute good investment opportunities.
Methodology and sources
You will find more details regarding the non-speculative approach and the performance of the investment funds examined in the infographic below. The methodology and data sources used are also detailed there.