Largest firms gaining lion's share of allocations
Actively managed strategies are still seeing inflows, but the bulk of that institutional capital is going only to a small number of managers — and strategies.
Pensions & Investments' data show managers held $7.1 trillion in internally managed U.S. institutional tax-exempt assets in active equity and fixed-income strategies as of Dec. 31. Of the managers reporting actively managed assets, the 25 largest held nearly two-thirds — 65.2% — of the assets.
Meanwhile, data from Morningstar Inc. show total net inflows into active U.S. equity mutual funds totaled $142.03 billion over the three years ended Dec. 31, 2016. Of those flows, 78% went to the top 25 managers on that list.
J.P. Morgan Asset & Wealth Management topped Morningstar's list, receiving $19.47 billion in inflows into those actively managed U.S. equity funds.
“We continue to see slow steady growth each year,” said James Peagam, New York-based head of North American institutional asset management at J.P. Morgan. Increased market volatility in the past six months has helped build the case for actively managed strategies, he said.
“We don't think it needs to be one or the other, by the way, so I think there is a home for both active and passive in portfolios,” Mr. Peagam added.
Macquarie Investment Management also is seeing heavy inflows within its active strategies. According to Morningstar, the firm received $8 billion in net inflows into its active U.S. equity funds over three years ended Dec. 31.
Shawn K. Lytle, head of Macquarie Investment Management, Americas, and president of Delaware Funds, said he feels “very fortunate” that Macquarie has attracted investors who still want active management, “since that's not the trend for most of our peers.”
Investors are being more selective in allocating to active managers that can complement good beta or passive management, Mr. Lytle said. “Generally, any strategy that is broadly just giving you benchmark-like returns are seeing negative flows these days,” he said. “Having an investment process that is indistinct from providing benchmark returns is not going to cut it.”
Although the pendulum in the U.S. is still moving toward passive, Mr. Lytle believes it will eventually swing back to active once markets start to have more normalized returns. “We're starting to see it in the institutional space,” he said. “I think we've reached an equilibrium point for institutional and defined benefit plans in particular.”
As to where investor dollars are going within active, Tim Bruce, Boston-based director of traditional research and partner at consultant NEPC LLC, said the active strategies that he's seeing receiving the most inflows are primarily in fixed income.
“In equity land, emerging markets small-cap and international small-cap also continue to get active dollars, in part because of inefficiencies and a chance to get alpha,” Mr. Bruce added.
The concentration of actively managed assets among a few large firms mirrors the trend across the institutional investing world of more money going to fewer firms.
“We've seen our clients pare down their manager lineups, which results in larger mandate sizes. This creates a simpler structure with fewer managers to oversee,” said Lauren E. Mathias, a senior vice president and U.S. equity investment consultant in Callan Associates' global manager research group in San Francisco.
Deb Clarke, global head of investment research at Mercer Investment Consulting, Chicago, speculated that if flows are going to large active managers, it's most likely due in part to asset owners being more comfortable with brand-name recognition, larger sales and distribution resources, performance track record, availability of strategies and other measures of success and size.
“We still have clients interested in active; the key is you're paying for active. People want some sort of factor-based investing,” Ms. Clarke said. “There's a degree where the opportunities for active management should be increasing. It's early days, but we believe there are active managers that can add value. This includes hedge funds.”
Callan's Ms. Mathias added that larger mandate sizes enable asset owners to better negotiate fees.
Kevin Quirk, a principal with Casey Quirk, a practice of Deloitte Consulting LLP, pointed out another reason for institutional investors being drawn to larger firms: “Large firms have been able to generate alpha engines that appear to work better and are more persistent, so I'm not surprised to see some winners coming from that area.”
Even as the big are getting bigger, sources said they're still seeing small- to midsize managers winning active mandates from asset owners — and that smaller managers can still compete.
“Although we've certainly seen clients allocate to large management firms, we've also seen allocations up and down the size spectrum, from midsized with around $100 billion in AUM to boutiques with around $2 billion,” said Chris Riley, global head of equity research at Aon Hewitt in Chicago.
Ms. Mathias explained that for smaller firms to successfully compete with the larger active managers, “providing good performance will certainly attract attention, as well as being flexible on fees.”
Although Mr. Quirk thought it made sense the big managers are winning the most mandates in active, he added he “would not theorize that there won't be winners coming from the specialist category as well.” He explained that investors' push for fewer portfolio managers and demand for passive management are driven by the desire for lower fees.
Mr. Quirk said both boutiques and midsize managers can still play in the active game, provided they have something unique.
Good active managers “will come both from broad global diversified scaled investment management companies but also specialists,” he said. “And the winners will be somewhat size-agnostic. Investors will really care about who can generate alpha.”
This article originally appeared in the May 29, 2017 print issue as, "Active management alive, but not everyone in on fun".