A majority of both active and passive portfolio managers believe that the ongoing shift toward passive strategies will continue for many years, new survey results show.
To address this ongoing movement, active managers should be experimenting with new products, alternative data sets and other investment tools to make their offerings more attractive relative to low-cost passive strategies, according to the study by Greenwich Associates commissioned by FactSet.
The report shows that more than 88% of U.S. active large-cap funds underperformed the S&P 500 over the last five years, and 74% of active large-cap funds underperformed similar index benchmarks over the same period in Europe and Japan. As a result, investors evidently have been shifting money into passive, index-tracking strategies, which reportedly are anticipated to make up as much as 24% of all global investment by 2020.
Portfolio managers reportedly agree that innovative products and approaches can make active strategies more attractive to clients, while active managers believe that outperformance is “ultimately the best way to compete with their passive counterparts,” according to the report.
The report also notes that many portfolio managers expect a bear market to be the most likely catalyst for a shift back to active, believing that actively managed portfolios will perform better in a downturn, even though empirical evidence does not necessarily support the view.
“Economic uncertainty will benefit those active managers that can take advantage of mispriced securities and emerging economic trends. However, managers should explore new products and approaches to differentiate their product suite and grow assets,” says Richard Johnson, Vice President of Market Structure and Technology at Greenwich Associates and author of the report.
Key takeaways of the survey include:
- While nearly 60% of active managers agree that alternative data can help active managers find alpha, only 28% are currently using this data.
- Approximately 50% of all study participants believe that active ETFs are an innovative product that can help managers differentiate and attract assets, but only 20% currently manage or plan to manage active ETFs.
- Smart-beta ETFs can be an important part of an investor’s portfolio, but only one-fifth of the survey respondents were currently managing ETFs or plan to launch one in the next 12 months.
- 32% of the active managers reportedly believe increasing focus on performance was the best way to address fee pressure, while 26% said initiating new investment offerings was the best way.
The report’s findings are based on interviews conducted between March and May 2017 with 68 portfolio managers, chief investment officers and analysts at asset management firms in the U.S., Europe and Asia, who were asked about current challenges facing the industry and competitive strategies for client retention and fund performance against broad market benchmarks.