that active management is on the wane, with a recent report from Moody’s Investors
Service, for one, finding that passive investing through index funds and ETFs
will be predominant in the US by 2024. Greenwich Associates, however, expects
that active management still has a role in the future.
to the Stamford, Conn., financial research firm, investors are moving their
funds to passive avenues as a result of active managers’ not being able to
outperform benchmark indices after accounting for manager fees. “These results have caused many industry pundits to
conclude that some markets—particularly highly liquid markets like US equities—
no longer provide sufficient opportunities for alpha generation. As such, they
believe the best way to invest in these areas is through passive strategies
that deliver market exposure at the lowest possible cost,” Greenwich reports .
move to active management is not tied to the economic cycle, but is more of a
fundamental long-term trend. However, there remain some justifications for
active management to continue to thrive. For instance: the overall growth in the money that institutional investors worldwide have
available to invest. Also, not all markets are amenable to passive investment
strategies. Some of them remain “complex, opaque and illiquid” and active
management can play a bigger role here, Greenwich says.
managers can continue to deliver value by developing new strategies. And active
managers can take advantage of “new distribution and client engagement models”
to facilitate their client interactions, Greenwich says, nothing that although
the profit margins for active management have been declining, they are still
healthy compared to those for other industries.
expects that not all active managers will be winners though, and the move to
passive management will also pose a threat to some. Those who will emerge
winners will have the advantage of working with clients in a complex area where
they have some special insight or superior information. They could also help
their clients with intricate challenges and add value in a way that justifies
who will not be successful will “stick to traditional, product-centric
approaches.” For instance, there are a number of asset classes that are
becoming more liquid but that institutional investors don’t see as offering
much opportunity to generate excess returns in, on a risk-adjusted basis. These
managers would be better served by developing ways to differentiate themselves
or going for new products in other areas.
Stanley also expects that it’s too early to sound a death knell for active
management. Lisa Shalett, Morgan Stanley’s head of investment and portfolio
strategies, wealth management, blogs that while active managers
have had a tough time in the past several years, as money flowed to passive
management strategies following the financial crisis, it’s likely that better
days are ahead.
says, “We are in the early stages of a major
regime shift, from monetary to fiscal policy; deflation to inflation; and low
volatility to high volatility. History suggests that this is when active
managers have the best potential to find mispriced securities and earn their