Mohamed El-Erian says passive investing doesn't make sense any more now interest rates are climbing

• Mohamed El-Erian says active investment makes more sense than passive in this murky environment.
• The top economist said the economy is getting worse, which means the risks in active and passive strategies even out.

Mohamed El-Erian says it's time to get back into active investing, because a passive approach doesn't make sense any more in a murky economic climate of high interest rates and low liquidity.

Over more than a decade, investors got used to an environment of artificially low interest rates and government cash injections, which lifted almost all assets across the board. That environment longer exists, the top economist wrote in a Financial Times op-ed.

"This is an investment world in which greater selectivity, smart structuring and dynamic asset allocation trump more often the lower fees on passive vehicles," El-Erian said in the op-ed published Tuesday.

"It is a world that warrants a partial return to à la carte selection after many years of widespread fixed menus."

In the past, there didn't seem to be much need for people to hunt out individual investments, given the likelihood of high returns and low volatility, he said. Companies jumped into offering passive portfolios, with competition between them driving down fee costs, and they started to build riskier parts of the market into products.

But passive approaches aren't so attractive anymore in an increasingly deteriorating economic climate, according to El-Erian, the chief economic adviser at Allianz.

"This common global factor was first shaken and now dislodged by rises in inflation that have required central banks to hike rates and reverse injections of liquidity into the economy," he said.

The US Federal Reserve raised the benchmark interest rate by 75 basis points four times last year, taking it from near zero to 4.5%, to try to cool inflation at 40-year highs.

"The outlook for investors is further complicated by growth risks as the three most systemically important economic areas globally — the US, Europe and China — have slowed, albeit for different reasons," the economist said.

Others influential market voices have said passive investing has become too dominant. Tesla CEO Elon Musk and Ark Invest CEO Cathie Wood have said it prevents regular investors from getting in on big gains for surging individual stocks.