"All of us in the room I think, from a philosophical viewpoint, need to sit back and say, 'what do we actually believe?' Do we believe that markets are efficient, semi-efficient or not efficient at all?" S&P Fund Services director Paul O'Connor said at the FPA 2010 National Conference yesterday.
"I tend to think that from an investing viewpoint, the starting point if you have no further information about managers or securities and you go through your portfolio construction and you get your asset allocation in place, the default would be to passively invest.
"With passive investing, what we are doing is simply trying to capture market returns because of all those unknowns with market efficiency versus market inefficiency."
He said groups that firmly believed in active management and market inefficiency needed to consider what skills they had in finding the managers that wouldn't underperform and whether added factors such as higher fees and increased turnover would still deliver a better outcome.
"Should they do it themselves or should they use a research house to assist in locating the alpha-generating outperformance?" O'Connor said.
"There is really no simple answer. We also need to look at each asset class and think about each asset class and the efficiency overlays on the asset classes."