InvestmentsOct 2 2014

JPMAM chiefs call on active managers to show value

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Massimo Greco, the group’s head of continental Europe funds, and Paul Quinsee, chief investment officer of the US equity large-cap core and value teams, said the use of passive investment was continuing to grow unabated.

They have called on active fund managers to attract investors by taking steps to prove their worth.

Mr Quinsee said the passive threat had been encroaching on active management since 1986, and that active managers needed to “believe in the economic cycle and bet on the cycle, because that is what they are paid to do.”

Mr Greco agreed the trend towards passive funds, such as exchange-traded products, was “significant and will only increase”.

But he said he was “not afraid” of passive investing as he thought its growing presence shone a light on the quality of active management.

“The problem is there are a lot of funds in the European equity market that are priced as active, but are actually passive,” he said.

Mr Greco said this meant investors were being charged for fund managers to do very little stockpicking.

Mr Quinsee said active managers would soon have to deal with a difficult period given he expected some renewed volatility in US equities.

He said investors were worried about how much time was left in terms of the strong equity market performance which has been produced of late.

“We are always going to have to worry about volatility,” he said. “However, this time the main concern is how equities are going to stack up against other asset classes.”

Elsewhere at the group’s conference, Robert Michele, the group’s global fixed income chief investment officer, said investors were confused about the state of the bond market.

“Investors do not understand how we are in a 30-year bull market,” he said.

“They get the first 25 years, but it is the past five years that are confusing everyone.”

Starting in 2013, some market commentators had predicted a so-called ‘great rotation’ from bonds into equities – however, both asset classes have largely continued to rally.

Indeed, some peripheral European government bonds have rallied to such an extent that 10-year bonds from Ireland, Italy and Spain all yield less than the respective UK gilt.

Mr Michele said he thought there was value to be found in some sectors, particularly in financials, given banks are issuing new types of debt such as convertible bonds.

Convertible bonds are like bonds in the sense that they pay income, but they are also similar to equities as they can be converted to shares of the company’s stock.

How much of a threat do passive funds pose to active funds?

There have long been accusations of some active funds being ‘closet trackers’, where the manager decides not to stray too far from their benchmark index.

But how much is the UK investor base actually putting into passive funds?

Data from the IMA shows retail investors put more money into tracker funds in July than in any other month since the trade body’s records began. Open-ended passive funds saw record net retail sales of £532m in July. However, the IMA’s annual report released earlier this month appeared to cast doubt on the meteoric rise of passives, given growth had been “broadly stable” since 2010, when the proportion of industry money invested passively hit 21 per cent.

Another consideration is price. The rise of ever-cheaper passive funds has put a focus on the cost of investing, with Vanguard now offering a US equity tracker fund for 0.07 basis points, all in.

Fidelity is equally competitive, with a UK equity tracker at the same price.

Given the IMA’s chief executive Daniel Godfrey is working on producing a total cost of investing figure, active fund managers will need to make sure they are delivering the goods if they want to keep their pricing where it is.