Equities: Tough year for active managers is good for ETFs
Focus on asset allocation; Stockpickers punished by macro
Given that 2011 must have been one of the most difficult years on record for many fund managers it comes as little surprise that year-end performance figures for the industry were brutal. According to research from Citywire, just 33% of active managers were able to outperform benchmarks in the first nine months of the year. That is even lower than in Lehman-plagued 2008 when 38% of managers outperformed.
It is no surprise that advocates of passive investment strategies – the ETF industry in particular – have seized on the figures as evidence that the fees charged by active managers are unjustifiable when such funds consistently underperform benchmarks.
Rocks in the water
"The primary issue is down to cost," said Justin Urquhart-Stewart, co-founder and marketing director at Seven Investment Management, at a recent industry roundtable. "If we are to have a low, low growth situation going forwards then that means costs will stick out like rocks through water. The reliability of active managers to beat indices over time has been called into question. If active managers wish to continue they have to provide better value."
"People are favouring passive management. This is part of a long-term trend: the focus is on asset allocation rather than stockpicking"
Data from Morningstar indicate that passive funds won 39% of new money garnered by bond funds in 2011, a strong increase from 22% in 2009. What is unclear is the extent to which this shift from active to passive management is a long-term trend or is simply a reaction to a tough year for active management.
Nizam Hamid, head of ETF strategy at Société Générale-owned Lyxor ETF, claims that the flow of investments to passively managed funds is merely the latest stage in a trend of investors seeing more value in passive management. "We’re seeing a general shift in how people manage their portfolios," he explains. "People are favouring passive methods of management. This is part of a long-term trend: the focus is more and more on asset allocation rather than stockpicking."
However, the volatility in the markets means that investors are applying a diverse armoury of investment strategies that have often blurred the lines between passive and active techniques.
"When macro factors are dominating it can be a tough environment for stockpickers, so returns after fees in that environment are typically less attractive. When the macro issues settle down though, their skills come to the fore," says Andrew Cole, lead manager of Baring Asset Management’s multi-asset fund. "Investors should make a choice when looking at an asset class: they should think about the outlook for the next 12 to 18 months and think about whether active or passive management is going to be more cost-efficient. A pragmatic view will get the best results for the relevant environment."