Opinion  

Is the end nigh for last bastion of active management?

John Lappin

There can be times in financial services when you realise that what many people have been predicting has become the market reality.

Once upon a time, a few years ago, predictions included the widespread adoption of wraps and platforms, the death of commission, the embrace of financial planning and much more. And then because of the market, or the regulator, or the influence of some leading-edge businesses, it actually happened.

Of course, not all such predictions necessarily come true either. Some fade away or their day does not come with quite such force.

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But surely one of the most interesting trends – or even fights – in financial services is between the active and passive camps, and what that means for the investment solutions that advisers recommend.

Whether we are at a tipping point or not, there may be a clear indication of the direction of change not too far away. The UK institutional pension market has seen huge new business gains by indexing and low-cost fund management providers. The likes of L&G and BlackRock are clearly winning a huge number of mandates, as FTfm’s recent research shows.

Now the big question is whether retail, the last bastion of active fund management, will follow suit.

Many of the pressures are the same. There are concerns about the value added by active managers, or more specifically whether any outperformance can be justified by the higher fees involved.

There is an increased focus on the ultimate needs of the scheme members through liability-driven investment, and many of these pressures are coming to bear in financial services, too.

Advisers from both sides work for the same businesses, of course, and many share best practice. It isn’t and shouldn’t all be one-way traffic. There is a great deal the advised side of the market could teach their corporate investment advice peers about optimising pension income choices, to pick one example.

Yet I suspect we are going to see a huge embracing of passive vehicles, not just because of the many evangelical advocates but because cost and regulatory pressures remain high.

In fact, such pressures may very well be increasing the passive content of portfolios. Even where advisers have not selected passive explicitly, the discretionary fund manager may well deem it the best way to obtain exposure to all kinds of assets.

This will probably throw up a host of challenges to active fund houses, especially the bigger ones, similar to what is already happening on the institutional side of the market. A multi-asset capability may help, but I am not sure it is a panacea for everyone.

But the real challenge for investment advisers will be whether they can update much of the rest of their thinking about investment solutions – things such as strategic, and in these QE-taper-fearing markets, tactical allocation. A lot of theories about markets, such as ideas about efficient frontiers, either need modernisation or maybe even consigning to the dustbin of investment history.