Active money managers could become victims of their own success at identifying mispriced securities.
And those with the least conviction could be the first to fall off the edge of the investment universe, analysts say.
Active managers have gutted their ability to deliver alpha to the clients paying their hefty fees, setting the stage for an accelerating shift to passive strategies, said Charles D. Ellis, founder of money management industry research house Greenwich Associates. (See related story: "Shift to passive may not signal prospects for alpha.")
In a Sept. 10 interview, Mr. Ellis said active managers as a group have become “so good at what they do” that individual managers are no longer able to “beat the crowd.”
While Mr. Ellis began making that point as far back as 1975, in a Financial Analysts Journal article titled “The Loser's Game,” his latest bite of the apple — a July FAJ article, “The Rise and Fall of Performance Investing” — comes as developments such as the rise of factor-based “smart beta” indexes and expectations of a long stretch of meager capital market returns look set to make life tougher for active managers.
The advent of “smart beta” over the past five years has left asset owners with a more complex set of options than the traditional “barbell” approach, with passive at one end and active at the other, said Peter Ryan-Kane, a consultant and head of portfolio advisory for the Asia-Pacific region, ex-Japan and Australia, with Towers Watson Investment Services, Hong Kong.
As investors gravitate to more cost-effective solutions — whether pure passive or factor-based exposure to value, size or minimum volatility — the market share of active managers should drop, predicted Chia Chin-Ping, MSCI Inc.'s Hong Kong-based head of research for the Asia Pacific region.
The scale of that decline could depend on how quickly active managers reinvent themselves, for example by offering strategies that tactically shift allocations among various factor indexes, he said.
Mr. Ellis said the shift by asset owners to passive from active — both traditional index strategies and exchange-traded funds — is accelerating, even if it remains well short of a paradigm shift.