The biggest trend in the global asset management industry in the last two decades has unquestionably been the rise in passive investing. It has placed active managers under a level of scrutiny they have never felt before.
“Research from JP Morgan shows that over the last 20 years flows into traditional long-only active funds have flattened,” says Kyle Hulett, head of asset allocation at Sygnia Asset Management. “Passive, on the other hand, has had positive inflows of $4 trillion in the US alone. That is a massive shift.”
Primarily, this has been due to a growing focus on the fees being charged by active managers. As growing amounts of research have shown that very few fund managers outperform a broad market index over meaningful periods of time, investors have seen the value in low-cost, passive alternatives.
In South Africa, this awareness of the importance of costs has been heightened in the current low-return environment.
“Fees are being squashed at all levels, because when returns are low you notice what you are paying even more,” says Hulett. “Passive has always been a big focus of our philosophy, and a component of all our funds is passive to allow investors to benefit from that lower cost.”
As this cost-sensitivity among investors has increased, many active managers have responded by lowering their fees. However, this alone is not enough.
“I think the fee pressure is being felt mostly by those who have historically struggled to deliver competitive returns,” says Thabo Khojane, MD of Ninety One Africa (formerly Investec Asset Management). “From our perspective it’s about value for money rather than just the level. That doesn’t only look at costs, but also at outcomes.”
The real scrutiny is therefore falling on active managers who have failed to meet investors’ expectations.
“If I look at our flagship high equity multi-asset fund, the Investec Opportunity Fund, the proposition is fairly clear – to deliver equity-market-like returns net of fees, at half the volatility of the equity market,” Khojane explains. “If we’re able to do that, investors are comfortable with the fees that come with it. But for those who have been below average in terms of outcomes, I think fee pressure is significant.”
Put another way, the rising influence of passive investing has not only forced active managers to lower their fees, but also to consider what value they are actually delivering.
“One thing we definitely know is that you need to justify your fee, because investors have alternatives now,” says Duggan Matthews, investment specialist at Marriott. “We’ve always been confident that we can add something beyond performance, which is providing sustainable income. That is different to what an index tracker provides and different to what our major competitors offer.”
It is also something that can be far more reliably and predictably produced than simple outperformance. This is an example of managing portfolios for a particular outcome, which is where the biggest opportunity in active management may well lie.
Giving investors what they need
“Solutions are something [that is] changing the industry,” says Lourens Coetzee, investment specialist at Marriott. “You can’t just offer equities, for example. You need to package them in something that’s useful to clients.”
Matthews agrees: “If you are going to be in this industry for a long time as a small player, you are going to have to do something different. The bigger guys with huge investment teams can take on the outperformance game, and passive can give you the market. Outside of that, I think the industry is crying out for more outcome-based models, where the benchmark doesn’t have to be the index – it could be a plan or an outcome or a goal.”
Investec Asset Management (Ninety One) was recognised as the best fund house with a larger fund range at this year’s Morningstar Awards. Sygnia and Marriott were runners-up in the category.