Active managers’ comeback plans have gone awry

After a long period of healthy returns for many indices – and an accompanying surge in tracker product sales – the more difficult environment of 2016 was predicted to be one in which fund managers would prove their worth.

So far, things haven’t exactly gone to plan. Markets have indeed proved tougher to navigate, but the way in which this has played out has been far from helpful to the industry.

First, we had the correction – so far, so predictable, at least in the eyes of those who had become increasingly bearish as 2015 progressed.

It was what happened next that threw many off track. The rally was as sudden as the sell-off, and was driven by sectors that few wanted to touch: those focused on resources and emerging markets. The result is active funds struggling again, as we detail elsewhere in this issue.

So after several years in which the industry, in aggregate, underperformed on the way up, it’s now also doing so during a more volatile period.

Industry-wide retail outflows aren’t masking much in the way of individual success

Advocates would say a little research makes it much easier to avoid the worst culprits. UK managers, for example, had been able to outperform prior to this year by simply underweighting commodities.

But the sudden change in sector leadership means these standouts now face a tricky decision. Continue with that policy, and risk lagging a rising market, or buy back in and risk a further drawdown?

This, clearly, is only the latest version of the perennial dilemma for those who (like it or not) are still judged on relative performance. However, the rotation will only add weight to claims that managers marketed on past performance are setting themselves up for a fall.

It’s also a topic thrown into sharper relief by the other pressures being brought to bear on active management.

A wholesale move out of active funds in a way not seen since 2008 has compounded managers’ market worries. In addition, Morningstar estimates indicate these industry-wide retail outflows seen in January and February aren’t masking much in the way of individual success.

It is worth emphasising this migration may not be confined to active products: trackers also saw net flows slump last month. The active versus passive debate has, for now, fallen away in the face of general nervousness. Investors are temporarily pondering their options in response to whipsawing markets, but active managers must worry they’re not as well placed to provide an answer as had been hoped.

Dan Jones is editor of Investment Adviser