Ten years on - asset managers reach 'peak product'

Lawrence Gosling

Earlier this year the head of IKEA in the UK suggested the economy might have reached 'peak stuff.'

He was talking about the flat-packed 'stuff' which is the cornerstone of IKEA's business, but it was a catchy phrase which resonates if you see the amount of dismantled furniture at recycling centres around the country.

The chief executive of an asset management company reminded me of this comment recently and suggested we might have reached 'peak passive.'

If you're still with me, you're immediately asking if CEO in question runs an active or passive asset management business? Well you probably already know the answer to that.

He runs an active management company, so to coin an old expression: 'He would say that, wouldn't he?'

Perhaps he would, or at least many of his peers would certainly say it.

Active asset management companies can probably be divided into two simple camps - boutiques or asset gatherers.

The asset gatherers have a simple mission in life - the attract as much new positive inflows annually to build the short-term revenue base and meet the earning expectations of shareholders and key employees.

The boutiques also have a simple mission in life: to achieve a good return relative to the benchmark index consistently over a number of business cycles.

The observant amongst you will notice I didn't discriminate in the last comment between the active and passive parts of the fund management industry here and I have not yet mentioned price.

The CEO of the active group who inspired this column measures the success of the business in terms of the active return after fees relative to a stated benchmark. If he was pitching to an institutional client he might add in the criteria of the return relative to the risk budget, but let's keep it relatively simple for now.

Ironically the active CEO has a number of funds in sectors which are well served by passive strategies, where the definition of 'success' is slightly different.

For the passive players clearly the replication error - the lower the better - is a measure of success, but also there is a built-in 'hope' that the index or indices they are following go up, which brings with it many challenges.

Not least both the active and passive players in this example are providing exposure to new and emerging asset classes - we're not talking a US equity strategy here.

The view from here

Certainly the data suggests the 'market' is far from 'peak passive' when viewed almost everywhere around the world, particularly as measured by the excellent ETFGI, a leading independent research and consultancy firm.

It says assets invested in ETFs/ETPs listed in Asia Pacific (ex-Japan) increased 19.9% in the first eight months of the year to reach a new record of $155bn at the end of August 2017. ETFs and ETPs listed in Asia Pacific (ex-Japan) gathered $2.67bn in net inflows in August marking four consecutive months of net inflows.

"August is typically a challenging month for equity markets with the average loss over the past 20 years for the S&P 500 at 1.3%. This year the S&P 500 was up 0.31% in August and 11.93% year to date, MSCI ACW was up 0.44% and 15.48% YTD while MSCI EM was up 2.27% for August and 28.59% year to date. Storms and political risks remain a focus for investors - the ability of the Trump administration to move forward on policy goals and hearings on Capitol Hill, Brexit negotiations, and North Korea is still an area of concern," according to Deborah Fuhr, managing partner at ETFGI.

So the data would suggest appetite for passive remains relentless but perhaps anecdotally the launch by Vanguard in Europe of its range of actively managed equity funds might suggest that 'peak passive' could be getting closer.

Or it might simply suggest that Vanguard views Europe as the same as the US in terms of appetite for both active and passive strategies and it's not a question of peak passive or too much active, but the more logically conclusion.

Investors - by which I mean professional or institutional investors - want choice or a blend to fit their own view of the investment landscape.

As we head towards the tenth year since the collapse of Lehmans, asset managers might want to the world to look as black and white as active or passive, but the reality in slightly greyer.

But the truth is power has shifted from asset managers, either active or passive, wholeheartedly, to the fund buyer. So it's not peak passive that matters but peak product manufacturers.

Lawrence Gosling is the founding editor of Investment Week.


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