Why active management is not dead?
The rising popularity of passive funds will not herald the demise of pure active asset management.
According to Thomson Reuters Lipper, 2016 represented the European passive fund industry’s best period in terms of net flows in 13 years, despite an overall reduction in mutual fund net sales compared to 2015.
With passive investments accounting for a steadily increasing share of total assets under management, questions have arisen over the future of active management amid mounting fee pressure and intensifying regulatory scrutiny.
However, Davis, who joined Kames in October 2013, does not believe all forms of active management will, or even could be, indexed out of existence.
“Active management is not dead,” he says. “The asset managers facing a model change are those with funds that track the index and charge active fees for it. But pure active funds that consistently deliver what investors want will absolutely continue to have a place in portfolios, along with passive and even smart beta – funds that can play an important role as well. I don’t think that situation is going to change anytime soon.”
Irrespective of the increasing appeal of passive funds, Davis believes active funds will continue to offer investors’ an attractive option not only at certain stages in market cycles, but also in specialist areas that are harder to replicate in indexed forms.
“If passives perform well during phases in the cycle, good stock pickers seize opportunities as they emerge, particularly in periods of elevated volatility when markets have been on strong runs and may be due a correction,” he says. “Conviction managers who consistently deliver alpha will remain valuable, and we believe clients will continue to pay for their skill.”
Clients will also continue to seek funds that can meet their specific requirements in environments that might not be conducive to delivering them easily, says Davis. “In a low interest rate world, investors at or near retirement will be drawn to funds and managers able deliver income in the way they require it,” he argues. “That might mean, for instance, income generated monthly within low volatility, diversified strategies that can protect and potentially grow their capital. Delivering that with an attractive yield is not an easy thing to do outside an active fund that can allocate dynamically to alternative income sources.”
Nonetheless, Davis says many active managers, particularly those offering specialist strategies, must ensure their propositions are not only differentiated but also clearly understood by the wider market. “If you are a specialist you have to be very clear about what you offer and what you are doing differently, not just relative to the index but also in relation to the rest of the market,” he says. “That is key. Whether that means a specialism within property, a focus on ESG, different ways of delivering alpha with low volatility – you have to show you can deliver on a repeatable basis. Active managers can’t compete on price; they have to demonstrate constant outperformance.”
More broadly, he says the active versus passive debate is often too binary and risks overlooking the key question facing those advising and providing services to investors.
“Passive investments, smart beta funds and active funds all have their place in the market,” he says. “None is inherently better. It is down to what investors want, what they want to pay, how much risk they want to take, and over what timeframe. That is the arbiter of value. Intermediaries’ role is to match the expectations of investors with the right strategies. Saying passive is better than active or vice versa overlooks a vital question: what does the customer actually want?”
Martin Davis is the CEO of Kames Capital