Active investment stalwarts Legg Mason and F&C Investments are considering moves to muscle into the passive fund market, as asset managers accept the need to embrace the tracker trend.
Many of the world’s top fund houses have long insisted that active management, where a fund attempts to beat the returns on the wider stockmarket, is worth the extra fees its customers pay over simply buying a passive index tracker.
But UK investors are now allocating an increasing slice of their assets passively, partly inspired by a sharp focus on charges in recent years.
The trend has been eyed nervously by many established asset management houses, but the potential entries of Baltimore-based powerhouse Legg Mason and London’s F&C into the passive space suggests such investing has reached critical mass.
Legg Mason, a bastion of active management, acquired New York-based QS Investors, a smart beta provider, in March this year. The group said the idea of bringing QS’s ‘smart beta’ products to the UK was under consideration.
Smart beta funds are passive based. However, they differ from straightforward trackers in that they use specific market characteristics and factors to enhance their tracking, such as GDP weightings.
Adam Gent, head of UK sales at Legg Mason, said: “Smart beta is something we have the capability to offer and are looking to bring to the UK retail market.”
F&C has recently been bought by major Canadian group Bank of Montreal, which is the leading provider of exchange-traded funds (ETFs) in its domestic market with $15.3bn (£9.5bn) of ETF assets under management as at the end of June.
Rob Thorpe, head of UK sales at F&C, said bringing the parent group’s passive funds to the UK was under consideration.
“It would make sense to use these capabilities and enter the passive market,” he said.
“It has matured past just debating between active and passive funds. For some parts of the market cycle, passive funds are a sensible choice over active funds.”
Other asset managers have also started showing an interest in passive investing. Earlier this month, Amundi announced it would focus on its ETF and indexing expertise with an aim to double its assets under management in that part of its business in the next three years.
Other asset managers are anticipating an increased demand for passive products, with Fidelity recently launching a set of tracker funds at ultra low prices in a bid to attract market share. This has sparked a price war recently, with Vanguard also moving to slash the price of several of its passive funds.
Investors are ‘intrigued’ by smart beta
The active management industry has increasingly come to accept that passive investing will have to feature in its business model if it is to maintain profitability.
Richard Romer-Lee, managing director of Square Mile Investment Consulting & Research, explained there is a growing demand for passive investing.
But he said the passive market would not accommodate many more asset managers.
“Passive investing is a great way for asset managers to diversify their offerings, but they will have to compete with the big players,” he said.
“The question is how many choices do investors need and can they offer a competitive price.”
But for those asset managers looking to inch into the market he suggests offering smart beta options.
“Innovation is coming from smart beta offerings. They are not passive as we define it, but investors are certainly intrigued,” he said.
