If everything was passive, nothing would move
In an exclusive interview with FAnews at the recently held Investment Forum, Azad Zangana – Senior Economist at Schroders – explained why active investing is alive and well.
If you could make one case for active investing, what would it be?
If you are going to go the passive investment route, once you have paid the fees, you have guaranteed that you will underperform/track the index. You will never outperform the index in this way.
If you go the active route, there is a reasonably good chance that you will outperform the index at some stage. At least you will have someone trying to beat the index on your behalf.
In recent years, the rise in passive investments has brought a new change to the industry. It provides the average investor, who feels they know enough about the market, to invest on their own. There is a place for it in some part of certain portfolios. However, there is always a natural limit on how far it can go. If everything was passive, nothing would move. The markets would not move at all.
What can active managers do to attract clients?
Active managers have got to step up their game. They cannot hide behind the benchmark anymore. If they are going to call themselves active managers, then they have got to be active. They must earn the fees that they charge, and this is something that Schroders completely agrees with.
Active managers are under pressure from exchange traded funds (ETFs) and other passive vehicles that can provide an investment service for much lower fees. This leaves the door open for true active fund managers to carry on with what they do best and show value.
What are the dangers of becoming creative when generating alpha?
There is an absolute danger in creativity. This danger depends on the level of engineering that goes on while generating alpha. We all know that the big contributor of the 2008 Global Financial Crisis was the use of specific vehicles that were partly designed to allow for certain very liquid assets to be sold worldwide. This type of creativity can cause dangers because it introduces a level of risk into the market that is not necessarily monitorable.
I do not think this is what we are seeing in the market at the moment. I think that the issue is that returns have generally been quite low across the world because of low growth in gross domestic products. Another contributing factor is that interest rates have been low and bonds are becoming less attractive.
Why are we seeing creativity?
As average returns have been declining, fund manager fees have become much more visible. This is where creativity is coming in. Asset managers are trying to essentially create new markets through the use of different types of derivatives. They are moving into things like private assets or commercial property.
This is becoming more prominent, and I think that it is a good thing. The issue is that it has to be managed in a proper manner. Client expectations in terms of the time taken to see returns and the duration that they will need to be invested in order to see a return on investment needs to be managed.
As long as you can do that, it helps generate the income that people desperately want. This is how active fund management will be kept alive and well.