The long-running debate over active versus passive funds is destined to become redundant as new approaches that combine both styles of investing continue to emerge, according to the latest The Cerulli Edge—Global Edition.
“An investment model—structured around service provision and its high level of value rather than sales of yet another active equity fund—looks set to provide an alternative to active management fees,” says Justina Deveikyte, associate director, European institutional research at Cerulli Associates, a global research and consulting firm.
In the institutional market, the trend was evident in the search by National Employment Savings Trust (NEST) for private credit managers. Only external managers able to offer innovative fund structures had a chance of securing a mandate from the U.K. defined contribution (DC) workplace pension scheme. Investors typically access private markets via closed-end funds with a limited life. Yet, NEST wanted evergreen, scalable fund structures in one of the unique features of the mandates that involved creating the right structure to balance the liquidity and legal needs of DC savers.
Active management has been chipped away at by demand for strategies that offer similar exposures but without the fees, such as smart beta and “active” exchange-traded funds (ETFs). The latter, now established in fixed income, allow investors to tap products with, for example, higher or lower allocations to certain issuers to access the market in a “smarter” way, deviating from the benchmark, but still within a rules-based, systematic approach.
It is a passive-active combination that will increasingly manifest in equity strategies, predicts Cerulli. “For example, thematic exposure to developed equity markets, whereby active ETFs offering hand-picked, then packaged-up, basket exposure to broad themes such as robotics, climate, or rapid urbanization, is set to thrive,” says Deveikyte.
The focus is shifting from fees and price to value and outcomes, says Cerulli. This migration could see asset managers increasingly offering a mix of self-advisory mandates that encompass service provision around portfolio-allocation tools or risk-and-performance tools. Alternatively, instead of creating a wide array of products themselves, asset managers may increasingly source strategies from expert boutique fund managers in a more consumer-centric business model.
“Straightforward active equity will continue to face strong headwinds, yet the distinction between active and passive is starting to soften and the trend for thematic exposure, and the industry’s shift to services rather than products promises new avenues for growth,” says Deveikyte.
OTHER FINDINGS:
• Liberalization of the financial market in China is giving rise to potential new opportunities for foreign managers in the country, including retail funds, retirement assets, institutional investors, high-net-worth individuals, and foreign investments. Cerulli believes that global managers with good track records in certain specialized areas have an advantage.
• In the U.S., managers under fee-compression pressure, need to carefully think through their discounting decisions and consider the sustainability of their discounting programs, says Cerulli. An increased amount of data and transparency is enabling managers to better prepare for negotiations, but a lot of guesswork is still needed. Factors at play include the strategic importance of the client relationship, the potential for future cash flow from the client, the profitability of the strategy, and demand for the product.
