Higher interest rates, persistent inflation and more geopolitical risk offer active managers and hedge funds a bigger opportunity to beat simple buy-and-hold portfolios, BlackRock analysts wrote Tuesday in a paper that referred to the environment as a “new regime.”

“Static asset allocations — or set-and-forget portfolios — are a reasonable starting point, but we don’t think they will deliver as in the past,” BlackRock Investment Institute analysts including Vivek Paul and Andreea Mitrache said in the paper. “The era of ultra-low interest rates is in the past, and future expected returns look less attractive.”

In the decade preceding the Covid-19 pandemic, developed-market stocks and bonds beat the returns of cash by about 10 and 2 percentage points, respectively, according to the analysts for BlackRock, the world’s largest asset manager.

“Getting the asset mix right matters much more now,” they added, contending that “mega forces” are keeping interest rates above pre-pandemic levels.

“Macro uncertainty has ballooned since the pandemic struck – and dispersion of returns has increased,” the analysts wrote.

The BlackRock analysts join top executives at some of the largest firms, including Janus Henderson Group Plc, Franklin Resources Inc., T. Rowe Price Group Inc. and Neuberger Berman, in emphasizing the role of active management in current markets. 

But they’re confronting a client base that has continued to shift away from actively managed funds, with more than half of mutual fund and ETF assets in passive products since late last year, according to data compiled by Bloomberg. At BlackRock, which managed about $10 trillion of client assets at year-end, $2.6 trillion was in active equity, bond and other strategies. Index and ETF assets amounted to $6.6 trillion.

The gap between stock market winners and laggards has widened since 2020, creating a bigger opportunity to beat broad market returns, according to the paper. 

Shifting between indexes is also a form of active management, the analysts said, allowing investors “to exploit their skill in timing markets and their ability to consistently pick exposure to the right sectors, regions and styles.”

BlackRock said that finding skilled portfolio managers with the ability to outperform can be costly and difficult, and investors “with limited governance budget may choose to keep their entire portfolio in index tools.”