James Budden, director, retail marketing and distribution at Baillie Gifford, says the 70 per cent of the active fund market failing to create alpha could be in trouble post RDR, prompting outflows and consolidation.
Budden says the trend of herding has become commonplace over the past 10 to 15 years, and has led to a situation whereby some fund managers only have 10 per cent active share. With cheaper, unbundled share classes meaning investors will look more closely at active funds, they will be looking for outperformance of tracker funds.
“Active funds will have to be really active and create returns for unitholders,” Budden says. “Those which are just beating the index will be very unpopular.”
Budden says that as Baillie Gifford is an independent firm, it is not precoccupied with share price concerns, which allows the managers the time and space to focus on making active decisions.
“We have 80 per cent active share, whereas other managers have 10 per cent active share as they are too terrified to do anything else. It doesn’t work, it creates a herding situation where 70 per cent of active managers do not outperform. Post RDR they will all be found out, or they should be. We will see outflows and managers will realise themselves and there will be consolidation.”
“IFAs will realise and ask ‘why pay 75 basis points for a fund which will just beat the index when you can make 60 basis points by investing in a tracker fund, by paying less fees?’.”
However, Budden is not promoting tracker funds, which he says “are guaranteed to underperform the index due to the cost of trading”.
“Passive investments are becoming even cheaper, but we have our suspicions about [them]. They are replicating companies which have done well in the past, not those which will do well in the future.”