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September 13, 2017 01:00 AM

Portfolio managers think shift to passive will continue for years — study

James Comtois
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    ​Most portfolio managers, both active and passive, believe the shift toward passive strategies will continue for many years, said a new report issued by Greenwich Associates.

    Of the asset management executives Greenwich Associates surveyed for this report, 55% said they believed this institutional shift of assets under management toward passive will continue for several more years before equilibrium. Meanwhile, 14% believe this shift is structural and the long-term result will ultimately be heavily passive. Some 17% think the end of quantitative easing and changing macroeconomic environmental factors will benefit active managers and cause assets to move back into these strategies; 9% didn't know; and 5% believed the industry has already reached a new equilibrium level.

    Most active portfolio managers recognize that outperformance is ultimately the best way to compete with their passive counterparts. However, more than 88% of U.S. active large-cap funds underperformed the Standard & Poor's 500 over the past five years. In Europe and Japan, 74% of active large-cap funds underperformed similar index benchmarks over the same period.

    Another way the pendulum could swing back toward active management is for portfolio managers to increase the usage of alternative data, which includes satellite imagery and location data, the report said.

    "Portfolio managers are very smart, but haven't been able to stand out in terms of performance and haven't been able to beat the indices," said Richard Johnson, vice president, market structure and technology at Greenwich Associates, and author of the report. "Alternative data helps put more data in their models and could hopefully improve performance."

    However, although 59% of active managers agree that alternative data can help active managers improve their risk-return profiles, only 28% are currently using such data. "So, there's a bit of a disconnect there," Mr. Johnson added. "Alternative data is new. So, firms are looking at them but don't quite know how to implement them yet."

    Many portfolio managers expect a bear market to be the most likely catalyst for a shift back to active, believing that actively managed portfolios will perform better in a downturn. However, Mr. Johnson noted that he could find no "empirical evidence suggesting that active managers outperform passive in a bear market."

    The study also shows that about half of all participants believe that actively managed exchange-traded funds could help managers differentiate and attract assets. However, only 20% currently manage or plan to manage active ETFs.

    The asset management industry is increasingly under fee pressure. The study shows that 60% of asset managers believe their firms are facing fee compression. Even managers with passive components to their strategy said they were feeling fee pressure at similar levels to purely active managers.

    When asked how to address fee pressure, 32% of the active managers said they believed increasing focus on performance was the best way, while 26% said introducing new investment offerings was the way to address fee pressure.

    Greenwich Associates interviewed 68 portfolio managers, chief investment officers and analysts at asset management companies across the United States, Europe and Asia from March to May. The report is available on its website.

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