Despite the stampede of assets over the past few years into index funds, it’s way too early to proclaim the death of active management, according to a new report from consulting firm Greenwich Associates.
The firm argues that active managers are not only alive and well but also can thrive in the future by focusing on complex and specialized parts of the market.
“Who will be successful? It won’t be managers competing in segments that are falling to passive. But it will be in areas where managers have a unique insight or can exploit information asymmetry,” says Andrew McCollum, head of Greenwich Associates’ investment management practice for North America. In a report released Thursday, “Is There a Future for Active Management? How Active Managers Will Thrive in a Maturing Industry,” Greenwich Associates acknowledges that active managers do need to evolve to battle the continuing allure of passive, but there are plenty of reasons for optimism.
Among them: the persistence of opaque and illiquid markets, where passive has been less successful; evidence that active managers are the ones creating new products and investment approaches; and the growing demand by investors to form partnerships with active managers that provide services beyond just high-performing products. Greenwich Associates also notes that the pool of institutional assets around the world is growing, and many of those investors will choose active managers.
When it comes to trickier securities such as emerging-markets equities, McCollum, who co-authored the report, argues that investors will seek out specialist asset managers that have an edge in finding information. Passive managers, which buy every security in a benchmark without regard to quality, have had less success in delivering attractive returns in these markets. Active managers have been able to handily beat these funds.
But McCollum warns that to thrive, even specialists with an edge will need both a strong brand and the ability to articulate to investors what makes them different from rivals. “Brand and positioning will be increasingly important,” he says.
Greenwich Associates cites the need for asset managers to get away from focusing on their best-performing products and judging their success on whether they beat their rival up the street (or an irrelevant benchmark). Instead, clients want more advice and other support to meet their long-term goals. “At times, it seems like the two sides are not even listening to each other: Institutions are asking for help with their liabilities, and active managers are selling large-cap equities or U.S. fixed income on the basis of relative performance,” the report states.
Greenwich Associates provides quantitative data to support its optimism about active management, arguing that actively managed global assets are growing, albeit not as fast as passive strategies. Globally, assets under management in actively managed funds, including both traditional and alternative-investment vehicles, have grown from $37 trillion in 2008 to $56 trillion in 2015, according to the report. Greenwich Associates projects that actively managed assets will grow to $64 trillion by 2020. When it comes to institutional portfolios, alternative investments will make up a greater proportion of actively managed assets, at the expense of traditional investments, the report predicts. Active management will still represent 74 percent of institutional assets in 2020.
Still, Greenwich Associates says asset managers that strictly focus on products or don’t develop the ability to help clients with complex problems will lose out. Some will experience periods that are profitable, but the traditional business model is not sustainable in the long term, the firm argues.
McCollum emphasizes that in creating the report, the firm didn’t originally set out to write a defense of active management. Instead, it was researching the popularity of index investments as a natural outgrowth of the maturation of the asset management industry, which started in the 1980s. “If you think about it, passive is a form of standardization. Any mature industry struggles with that,” says McCollum.
