Our final pushback against a wholesale move into passive equity is that we expect that the more assets are passively managed, the more opportunities for active managers there will be to lean against simple factor exposures.
The same criticisms that apply to simple market-cap-weighted indexes (they are price momentum-biased and take no account of valuation) might equally be leveled at a lot of other smart beta strategies. Take minimum volatility strategies for example. These were launched with great fanfare in May 2008 by MSCI (the first on the market), with compelling risk-reward characteristics in the back-tests. And while they have just about kept up with the total return benchmark over time, they have also had long stretches of underperformance. If it was an active manager, we believe you would fire it.
The final problem we see here is that, if you choose smart beta instead of pure index ETFs, taking money away from active managers still requires an active decision. That's because someone still needs to time the factors, for example from value to growth and vice versa, as the market cycle demands. Who is going to do that?
In summary, we believe there are both structural and cyclical reasons to look again at active managers, for whom the opportunity set is increasing as the global financial crisis recedes in the collective memory. The structural reasons are the return of dispersion and the opportunities thrown up by smart beta. The cyclical reason is that late in a market cycle the risk reward of active management improves, assuming that alpha is constant while beta is lower. And now having set ourselves the task, it is up to us to prove these assertions!
Ben Funnell is the lead portfolio manager of the GLG Euro Equity and Global Equity strategies and of the GLG Balanced Managed and Stock Market Managed strategies.