Fund buyers shun passive investing, Natixis says

Portfolio managers are favouring active stock picking in current volatile markets and reckon investors may be turning “a blind eye” to the possible risks presented by passive funds, a report shows.

The Natixis Global Asset Management’s Professional Fund Buyers report says eight in 10 portfolio managers surveyed reckon individual investors have “a false sense of security” around investing passively and are not counting the possible risks for these strategies.

Wholesale portfolio managers says “minimising fees” is the only perk of passive funds, while active funds give them “a much-needed edge” to deliver higher risk-adjusted returns.

Natixis has previously found 60 per cent of 7,100 investors worldwide believe index investments are less risky than active and believe passive will protect them on the downside.

The fund buyers report, which surveyed professionals across 28 countries, says: “In essence the professionals offer these investors a reminder on the physics of indexing: you may get positive returns when markets are up, but you will also get losses when markets are down. One explanation for these misperceptions: 91 per cent of wholesale portfolio managers say investors are too focused on short-term results.”

The report shows portfolio managers have allocated more than two thirds of their portfolio to active funds and less than third (25.4 per cent) to passives in 2016.

For 2019, Natixis research predicts passive allocation will rise just above 2 per cent, while active funds will make just 2 per cent less than the current weightings.

To meet the most important objective for 2017, which is the delivery of high, risk-adjusted returns, portfolio managers say the way to go is alternative investments.

Respondents favour private equity (25 per cent), closely followed by commodities
(23 per cent), while real estate (32 per cent) and hedge funds (27 per cent) will “disappoint” investors this year.

Matthew Shafer, EVP of international distribution says: “While keeping a close eye on political and macroeconomic shifts in Europe and Asia, professional fund buyers see volatility as an opportunity. That is why they are looking to active management to both generate alpha and manage risk.

“We are seeing a marked shift from the old passive and long only active model to a new mix based on a core of active and low volatility alternatives with the addition of liquid and illiquid alternatives.”