Active management is not dead but Greenwich Associates warns money managers in a new report that changes in preferences by institutional investors toward passive investing could create some rough patches ahead.
“Increasingly there are going to be winners and losers among asset management firms,” said Andrew McCollum, a Greenwich Associates managing director who leads the firm’s North America investment management practice, in an interview.
The report, released Thursday, says winners will be firms that offer unique investment strategies or who can provide solutions to institutional client’s “complex challenges.” Losers on the other hand, it says, will be money managers that “stick” to a growing number of liquid asset classes that are “perceived by institutional investors as offering diminished opportunity for alpha generation.”
“The number of investment categories capable of supporting robust active management franchises will shrink as large-cap global equities, certain corners of the fixed-income market and other areas become increasingly liquid and transparent,” the report says.
Mr. McCollum, one of the report’s authors, said in the interview that managers will need to be able to show their strategy differs from competitors.
“If you can’t articulate what makes you different than the next asset manager, you’re going to be in trouble,” he said.
The report cites investment strategies such as emerging markets, global equity, small cap, all cap, multiasset strategies and specialty fixed income as examples that active managers can use to succeed.
“Due to the complexity associated with investing in these areas, institutions require expertise and are much more likely to stick with effective managers through cyclical ups and downs,” the report said. “These are spots in which active managers will continue to thrive, and that successful active managers will demonstrate their value to investors.”
The report says that actively managed assets “are growing — perhaps not as fast as passive strategies, but they are growing nonetheless.”
Globally, Greenwich says the amount of actively managed assets reached $56 trillion in 2015 from $37 trillion in 2008. Greenwich predicts the figure will reach $64 trillion by 2020.
Passive strategies hit $16 trillion in 2015, up from $6 trillion in 2008, the report says. It predicts passive strategies will reach $23 trillion in 2020.
The report also highlights a changing distribution model for the institutional money management industry. It says that for asset managers to be successful they have to go beyond the traditional sales approach in which they are trying to sell a single strategy to investors.
Mr. McCollum said institutional investors today want a “trusted adviser” to help meet plan goals, and want advice and counsel beyond a single investment strategy.
He said that approach means that a sale might not occur because the investment strategy is the wrong fit. But in the long run, he said, building trust will help win future sales with potential institutional investors because the money management representative “has a seat” on the advice table.
