Nearly 7 out of 10 (69%) professional fund selectors from some of the largest wealth management firms in the United States agree that active fund management will be essential to investment outperformance in 2024.
This comes after 58% report that the actively managed funds on their platforms outperformed their benchmarks last year, and 65% expect the markets to continue favoring active management, according to findings from the 2024 Natixis Investment Managers Pro Fund Selector Survey released this week.
The findings are based on a survey of 198 U.S. fund selectors conducted in December 2023. Respondents represented private banks, wirehouses, registered investment advisors (RIAs) and RIA aggregators, independent or individual wealth managers, and other investment advisory firms that collectively manage nearly $20 trillion in client assets.
In fact, wealth managers have been working to get the right balance between active and passive investments over the past decade—a period which saw massive inflows to passively managed index funds across the industry, the report notes. Yet, 45% of fund selectors surveyed attribute the outperformance of passive investments to Federal Reserve policy or 10 years of artificially low interest rates and relatively no inflation.
Now, the market factors that elevated passive investing may no longer hold up, the firm suggests. Nearly half (49%) of fund selectors think that investors who are relying too much on passive investments like index funds will have some hard lessons to learn in 2024.
“Fund selectors expect the 2024 investment landscape to be anything but normal, not by historical, new- or next-normal standards,” said Dave Goodsell, head of the Natixis Center for Investor Insights. “They are looking to manage client investments, the client experience, and relationships by adjusting their firms’ product and model portfolio offering to help clients stay invested and armed with protection in unfamiliar investing territory.”
To that end, the survey found:
- 43% of fund selectors are looking to add more active strategies to their platforms.
- 72% say their firms now offer semi-transparent exchange-traded funds (ETFs), and 90% of those plan to either maintain (73%) or add more (16%) of these actively managed ETFs.
- 71% offer direct indexing options; of those, 84% plan to maintain (53%) or increase (31%) access to direct index strategies.
Assets in active ETFs—which differ from passively managed ETFs in that instead of replicating an index, there is a management team behind the portfolio—have soared in recent years, the firm notes. As such, the use of active ETFs is helping firms address price concerns—which has been a feature of passive investing—and the need to generate risk-adjusted returns, which passive funds don’t inherently provide.
Model Portfolios
Model portfolios and separately managed accounts are two other structures featured prominently in fund selectors’ product plans for 2024. Natixis IM found that nearly three-quarters (74%) have found that model portfolios give investors greater confidence in uncertain markets, help keep clients invested during periods of volatility (69%) and provide a more consistent investment experience for clients across the firm (78%). Not surprisingly, 61% say the use of models also helps advisors build strong relationships with their clients.
In this case, the survey found:
- 84% of fund selectors say their firm has some form of model offering. While most (65%) are proprietary models developed by in-house investment teams, 41% of fund selectors say they are adding more third-party models to their platform in 2024.
- 41% say their firm has a greater need for specialty models to complement core portfolios. The three strategies they are looking to add are high-net-worth models with advanced customization capabilities (49%), tax-managed (42%) and thematic models focused on market trends such as longevity, climate change, and disruptive technologies (36%).
- 77% currently offer clients access to separately managed accounts (SMA), and 35% of those intend to expand their SMA offering over the next two years.
Uncertain Outlook
Meanwhile, even though most (57%) respondents are optimistic about this year’s market performance, their outlook is muted by a high degree of uncertainty and unpredictable risk. The specter of slower growth ahead puts recession at the top of economic threats (54%), followed by the threat of war and terrorism (50%), and a decline in consumer spending (42%).
What’s more, the survey found that most fund selectors (68%) think valuations still don’t reflect company fundamentals, and 59% expect stock market volatility to be even greater this year than last. Should recession fears be realized, 61% think it would further reveal the inadequacies of passive investments.
The survey of U.S. fund selectors is part of a larger survey of 500 professional fund selectors across Asia, Europe, North America and the United Kingdom conducted by CoreData Research. A full copy of the report can be found here.
