In 2013, Robert Shiller and Eugene Fama were two of the three recipients of the Nobel Prize in Economics, raising eyebrows among those who saw the former as having demonstrated that markets were inefficient and presumed the latter to be the father of the efficient markets theory.
A Credit Suisse paper later had a go at resolving this tension: “To be an active investor, you must believe in both inefficiency and efficiency… just not at the same time”, the bank’s analysts suggested. Inefficiency must be present in order to be exploited, and efficient pricing must ultimately exist to ensure investors can be rewarded for buying undervalued shares.
But it’s Mr Shiller who tends to chime more naturally with active managers’ beliefs. Inefficiencies are hunted down, bubbles are avoided, and structural changes to market structure are viewed as just another opportunity.
Look at dealing commission. Figures released last week show that the number of investment bank analysts, like those at Credit Suisse, has fallen 10 per cent since 2012. A sharper drop is expected in the coming years as the implications of Mifid II’s unbundling of commission become a reality.
One survey conducted last summer by consultancy Quinlan & Associates found that asset managers in Europe plan to cut their research spending by 50 per cent as they shift to an ad-hoc purchase system.
The death of the analyst is, of course, being presented as a positive. Companies become under-researched, meaning markets become more inefficient, meaning more opportunity for stockpickers.
This prospective timeline, however, doesn’t acknowledge quite how many managers, particularly those at smaller firms, rely on research in the first place. Without it, life will become much more difficult before things become better. Positivity here is a case of looking at the wood without realising the trees are starting to fall over.
A similar scepticism can be applied to the idea that the rise of passives will ultimately make it easier for active managers to flourish. The shift could be closer than is commonly suspected. On the back of surging flows into trackers and ETFs, a report from Moody’s, the ratings agency, has predicted the tipping point could be as soon as 2021 in the US.
The theory is that passives’ dominance will make markets more inefficient, eventually causing money to swing back to active. At the very least, this would severely thin out the active manager contingent along the way.
So the opportunities, such as they may be for active managers, would only end up existing for a dwindled band of larger firms, complemented by smaller businesses with deep pockets. But whoever survives, making it to that point is easier said than done.
Dan Jones is editor of Investment Adviser