UK Investors Parse Active Management

Terry Flanagan

Helena Morrissey, chief executive of Newton and chair of the Investment Management Association, said flows into active managers will rebound once there is a market correction.

Morrissey was on a panel at the Morningstar UK Investment Conference in London yesterday called “Is Active Management Dead?”

Assets in the global exchange-traded fund and products are expected to overtake global hedge funds during this quarter according to consultancy ETFGI. Assets in ETFs/ETPs globally reached a record $2.998 trillion at the end of April and the consultancy predicted that assets will break through $3 trillion by the middle of this year. For the first time in the US, retail investors invested more in ETFs than mutual funds in the year through to March according to Broadridge Financial Solutions.

S&P Dow Jones Indices said last month that less than a quarter of active managers outperformed market benchmarks over the last decade and only 4% of large-cap growth funds did so last year.

Morrissey said that in a rising market it is harder for active managers to differentiate themselves. “There will be a dislocation in the market and active will come back,” she added. “However there is no room in the market for closet indexers who charge an active fee.”

Katherine Garrett-Cox, chief executive of Alliance Trust, said on the panel that 70% of products the firm sold in 2013 were actively managed – but last year 70% were passive and that has continued this year.

“Investors fail to make the connection between what they pay in charges and waiting for returns,” she added. “Charges for passive funds can be lower but good active funds can deliver returns over many years and have the ability to find winning companies and sectors.”

Garrett-Cox said the average tenure for holding US equities between 1940 and 1960 was seven years, but this fell to seven months in 2007 and is now about two years.

The most successful active firms will adapt to the new market conditions according to Garrett-Cox. “In five years time the firms that survive will be the boldest and bravest that have swum against the tide,” she added. “Sustainable funds are a tiny proportion of assets today and will be one of the fastest growing sectors over the next five years.”

Mark Zinkula, chief executive of Legal and General Investment Management, provided some hope for active managers when he said at the conference that his firm had the largest flows into active funds over the last five years.

Zinkula said Legal and General Investment Management and high single-digit growth in passive funds, mid-teen growth in fixed income and property and mid-20s growth in multi-asset funds.

“We have had most flows into non-passive funds which are not trying to beat a benchmark,” Zinkula added. “Investors want their portfolios to achieve a certain goal within a specific timeframe, such as paying for college.”

Zinkula said active managers need to deliver greater value and more transparency on fees. Lesgal and General Investment Management reported this month that total assets increased 17% to £736.8bn in the first quarter of this year.

Nizam Hamid, head of sales at ETF provider WisdomTree Europe, said the growth in passive funds is not just a short-term trend.

Hamid added: “Investors need to have a balance between active and passive funds. Today investors have a lot more choice and low-cost model portfolios are available, which allow them to use passive funds to manage their risk.”

Featured image via Dollar Photo Club

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