Balancing active and passive

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News that passive funds have outperformed many active products has generated a lot of interest. As asset and wealth managers in Germany face growing pressure to o er cheaper solutions, are they now turning their back on active management? 

The passives trend represents a challenge for smaller boutiques explains Achim Backhaus, director and head of portfolio management Multi-Asset at Hauck & Aufhäuser. “Most of our clients, are wealthy individual investors who choose us over larger asset managers with the expectation that we are the best asset manager in order to advise them on asset allocation and select specific vehicles to generate alpha.

“One of our core competencies is European equities,” he continues. “If we were to go to our clients and tell them that we are unable to select the best European equity funds that would completely defeat the point. “Within our core competencies we do emphasise the importance of active management,” he stresses.

Similarly: “Sectors such as US or Emerging Market equities can benefit from an active manager as the performance of individual stocks or funds often deviates significantly from benchmark indices. “It used to be the case that you could select a high level of alpha by simply picking the right fund manager, but things are no longer that it is easy, in many cases, fund managers charge a significant fee for beta which is disguised as alpha.

“Today, no one is prepared to offer money for that, which is why we come up with our own solutions, we choose to consolidate significantly in the fund of fund segment,” Backhaus explains. Consequently, passive funds, particularly ETFs, continue to play an increasingly important function.

“We used to be very active and have become more and more passive. For example, we developed two new funds which make use only ETFs in their implementation.”

Marcus Stahlhacke works for a bigger company but the trends are similar. As head of retail funds and Multi Asset Active Allocation Strategies at Allianz  Global Investors, he highlights the growing importance of actively managed
multi-asset products in allowing clients to move up the risk ladder. “Investors today are focused on alpha, they continue to look for returns, despite the low-yield environment, in this context will continue to drive investors towards active strategies.” Yet, Stahlhacke also makes use of passive strategies: “We are using ETFs in order to diversify the portfolio and to provide liquidity.”

Overall, data on recent fund flows illustrates that despite the desire for alpha, ETF inflows continue to rise. Having only been available in the European market since the early 2000’s, investments in ETFs have increased dramatically. Between 2013 and 2014, net new assets in Europe tripled to €44.8bn and total assets reached €363bn, according to data provided by Lyxor.

According to Backhaus, one side effect of the growing demand for passives is that the importance of individual fund managers decreases. “The focus is less and less on fund managers and increasingly on  strategy. If I’m choosing to invest in passive products, I’m pretty much buying into my own view rather than that of a fund manager.”

While it is uncertain whether active or passive products will emerge as the most successful in the low yield context, most investors tend to approach both categories pragmatically. “We use ETFs as satellites, while the
core products are still centred around active selection and alpha generation,” Backhaus highlights.

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