Tough outlook for active managers

Tough outlook for active managers

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The outlook for growth for active managers is increasingly in question analysts at investment bank Jefferies said in a note to clients on Monday. 

Experts at the firm released their estimates of second quarter fund flows this week, citing headwinds on multiple fronts for stock and bond pickers.

“We expect only Affiliated Managers Group, Federated Investors and T. Rowe Price to report positive active equity flows in the quarter,” said New York-based equity analyst Daniel Fannon.

Meanwhile, he expects Alliance Bernstein and BlackRock to report overall positive flows from strength in fixed income and ETFs, respectively

Active managers, those who pick stocks and bonds in an effort to beat the market, have been struggling to compete with rivals offering cheaper funds that mainly track indexes.

“Passive investing has undoubtedly served investors well over the past 30 years,” said WisdomTree’s chief investment strategist, Luciano Siracusano, in a recent statement.

“Numerous studies confirm that, over time, the vast majority of actively managed mutual funds have failed to outperform comparable cap-weighted indices, after accounting for fees, expenses and transaction costs.”

Research house Cerulli said flows into passive mutual funds ($14.9bn) in May, 2016, once again offset flows out of active mutual funds ($13.8bn).

Over a longer period, statistics from the firm show active mutual fund and ETF market share continuing to erode, dropping from 77% in 2011 to 69% in 2015.

Almost one-third (31%) of mutual fund and ETF assets were invested in passive strategies in 2015, up from 23% in 2011.

"Investors are questioning active's value and fee pressure from intermediaries remains prevalent," explained Pamela DeBolt, associate director at Cerulli in a recent report.

"Active managers find themselves at a crossroads. They need to determine how to provide alpha in an environment in which the simplicity and low cost of passive appeals to investors and advisors."

Cerulli has also recently highlighted that many managers are broadening their product ranges to capture new revenue streams and to offset some of the problems they are experiencing as a result of their reliance on equities and bonds.

Lending to corporates has increased and liquid alternative fund launches have surged.

In the passives space Cerulli has previously highlighted an increased focus on smart beta-a product area that will be “hotly contested” by both active and passive managers.

In his note on Monday, Jefferies’ Fannon added that, more broadly, asset managers continue to face secular headwinds from passive with Brexit-related challenges only complicating matters.

As for Brexit, Fannon said this is likely to remain a key topic as there is a potential for ongoing sales disruption in these markets and the uncertain macro backdrop will take center stage.

Meanwhile, Jefferies says average AuM levels for most were up as the intra-quarter volatility was significantly less dramatic compared to the first quarter of 2016 (even after factoring in the days following Brexit).

“This will ease the pressure on advisory fee revenues when compared to 1Q and create a relatively favorable set-up into 3Q,” Fannon added.

“FX will be a notable swing factor in the quarter as currency movements were notably more dramatic than usual.”

 

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