NETHERLANDS - The Dutch Financial Markets Authority (AFM) has no preference for either active or passive investment management, but it "frowns on" index huggers, according to AFM supervisor Nicole Bastiaansen.

The supervisory body urged asset managers and advisers to "carefully weigh" both active and passive investment, particularly for the retail market, Bastiaansen told an audience of asset management experts at a recent seminar organised by Dutch asset manager Robeco.

She said the AFM would publish guidelines in the coming months as to how the supervisory body expected this 'weighing' to be done.

Based on a review of the academic literature, the AFM has concluded that managers and advisers should "take a critical look" at whether active funds actually add value to investors, as active management on average underperforms the market, Bastiaansen explained.

However, the same critical look should be cast at passive investments as well, she stressed.

She noted that there was "very little research data available on the performance of passive investments", which, she said, hampers an objective review of passive products and makes it hard to compare passive management with other forms of management and to the index.

In this vein, just recently, concerns have been raised regarding ETFs, as it is often unclear which underlying risks investors are getting into when investing in these passive funds.

The AFM called on the financial services and academic communities to pay more attention to passive management research. 

"The performance of passive products relative to the index has hardly been studied at all," Bastiaansen told IPE's Dutch sister publication, IPNederland.

"How do they perform as compared with the index when you take costs into account? And what risks are being taken as compared with the index? There is hardly any research available, and it is really important to have more data on these issues."

The AFM noted that the range of available products and strategies - both passive and active - was enormous, and the supervisor therefore stressed the importance of being "very selective" when choosing specific instruments and being transparent about the selection process, Bastiaansen said.

The main thing is that instruments should really add value to investors, she said.

Which is why the AFM, despite its declared neutrality in the active vs. passive debate, is anything but neutral toward products that charge high active management fees while closely hugging the index and delivering passive results.

Unless they add value in some other well-defined way - be it through diversification or specific risk-management benefits - "we frown on index huggers", Bastiaansen said.

"We'd rather see them gone from the financial markets altogether," she added.

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