Asset management think tank New City Initiative has warned of an industry bias to pushing investors towards passive and smart beta products in its latest opinion paper.
NCI says while there has been significant growth in passive products and smart beta strategies there is still a strong case for the inclusion of boutique asset management strategies in the portfolios of investors and the majority of investors could do better by selecting active managers.
“In the event of an equity market correction, it is inevitable some passive investors will get burnt. If we look back over the last seven to eight years, huge amounts of money have gone into passive, and this is resulting in significant crowding. At some point, markets are going to go down and passive investors are going to be hit by all of the downside,” the report quotes an NCI member as saying.
The think tank says attributes of specialist boutiques such as an owner-management ethos and the strong alignment of interests with clients offer structural advantages compared to closet index trackers, which it says charge high fees for index-like returns.
To get an edge over cheaper competitors, NCI says active managers need to adopt innovative technologies – such as distributed ledger technology or Blockchain – and improve the alignment of their fee structures.
Jamie Carter, chairman of New City Initiative, says: “NCI recognises the attraction of low-cost passive products as part of a portfolio solution for some investors but we believe there is a strong case for including active investment strategies in investor portfolios. However, it is important to stress that not all active managers are made the same. Boutiques have structural and cultural differentiators that give them an advantage in delivering value for money to investors.”