Investment manager Signia Wealth has explained why it has decided to increasingly allocate clients’ money to trackers, commenting on the fee pressure which is shaking up the asset management industry.
Since the end of 2015, the investment management firm has been replacing active managers that consistently fail to beat the benchmark with passive funds.
Speaking to FTAdviser, the company’s chief investment officer Etienne de Merlis said: “We have the same exposure to each asset class and less downside because the tracker does what the market does – rather than holding a manager who constantly underperforms.
“Where we don’t believe we can get alpha from employing other active managers, we use either derivatives or passives, which both have a lower fee burden.”
The fund house's balanced fund currently has 20 per cent exposure to tracker funds, which in turn has helped reduce the total expense ratio.
It also has around 25 per cent exposure to derivatives, which the investment chief said provides all of the upside in the equity market, and just 60 per cent of the downside.
Mr de Merlis also said the fee pressure on the fund management industry has pulled down the price of investing in external, third-party managers.
While the lower expense ratio does not lead to rebates being paid into client accounts or lower charges to clients, it does benefit clients in the long-term because the extra money is invested, which in turn boosts the performance.
A number of discretionary managers have been increasing their passive exposure recently, including the likes of Thesis, Seven Investment Mangement, and Smith & Williamson.
Mr de Merlis accepted that sometimes Signia will hold active managers that go through short periods of underperformance, saying: “We hire an active manager for a specific task, so as long as they are still applying the same rigorous investment process then we are happy to ride the cycle.”
The regulatory spotlight has increasingly been focused on the failure of active managers to outperform the benchmark, as the Financial Conduct Authority looks to stamp out funds that charge high fees for poor performance.
Signia’s investment chief warned that comparing all the fund managers against each other will have unforeseen circumstances on the industry because all stockpickers have different styles, saying it was unfair to compare the entire fund universe.
“[This comparison] gives you an idea of where you stand amongst peers, but I don’t think it should be the sole way of measuring performance.”
Mr de Merlis said it had been a “fairly dull” investment environment since the start of the year because market volatility was expected to rise due to political and geopolitical concerns.
Yet he pointed out that quite the opposite happened, with Donald Trump’s 100 days going by without any notable achievements, populism being averted in Europe so far, while the UK’s political decisions seem to have had a limited impact.