Questions about asset classes, individual companies or investment styles have been joined by a potentially much more fundamental investment question in the wake of the FCA’s Asset Management Market Study:- is trying to outperform the market through active fund management worth the cost?
The UK’s financial advice community is at the forefront of this debate, directing over £400bn of platform assets alone [Platforum]. The views of advisers will therefore help shape the future of fund management. Aegon asked more than 100 financial advisers where they stand on the debate and where they currently advise their clients to invest.
At present advisers largely back actively managed funds and report that nearly two thirds (64 per cent) of clients’ assets are invested in this type of fund. By contrast, one fifth (19 per cent) of assets are invested in passive funds while 12 per cent is invested in hybrid strategies that blend active and passive management together.
The findings highlight advisers’ continued support for active management’s ability to provide outperformance at a level that justifies the cost. This contrasts cheaper passive strategies that are designed to track the markets they invest in rather than outperform them.
However, despite the continued support for active management, passive investment strategies are growing in popularity. When asked how their fund selection had changed over the last three years, well over a quarter (28 per cent) of advisers reported using more passive management than they did previously.
That said, a further 41 per cent of those surveyed said there had been no change in the type of investment strategies they used over the last three years, suggesting that active fund management is likely to continue making up a significant proportion of the market for some time to come.
Interestingly, there has been an increased appetite amongst advisers for hybrid solutions with 17% of financial advisers adopting more hybrid strategies over the last three years. As the majority of outperformance tends to come from asset allocation, rather than stock selection, strategies that use active asset allocation techniques but hold passively managed components, can offer a lower-cost way of accessing some of the outperformance potential of active fund management at a reduced cost. While the numbers in our survey remain modest, this is a trend that we expect to see gathering momentum over the next decade.
Active management is still in a dominant position and retains a number of key advantages supporting higher fees:
- Active managers have flexibility to adapt to changes in market conditions and skilful managers can reposition in anticipation of market corrections.
- This critical point will become more pertinent if the eight-year bull market ends. After all, recent passive outperformance is based on favourable market conditions since 2009 across all asset classes.
- In addition, active management can drive value in less developed markets where public information isn’t freely available, markets are less liquid, and there is greater scope to uncover value.
We’re living through interesting times for the asset management industry. There’s no doubt that financial advisers will play an influential role in shaping the direction of the industry given the volume of assets they direct.
Active management will continue to play a key role and commentators could regret writing its obituary.
Nick Dixon is investment director at Aegon UK