While these ‘mega’ funds account for less than 1.0% of the total number of mutual funds available for sale worldwide (of a total ~65,000 funds), they control 45% of the total global AuM (USD 10.2 of 23.0 trillion).
“Passification” is the process through which investment categories once dominated by active managers are being captured by index-linked strategies. To avoid being passified, active management business strategies can take three dimensions.
1. Focus on passive-resistant categories
2. Employ high “degree of investment freedom” strategies
3. Redefine the current passive-biased framework
Following from our recently published “Periodic Table of Fund Flows,” we have created a Chartbook exploring the flow dynamics of liquid alternative funds – one of the fastest growing categories since 2008.
We applied our proprietary Degree of Investment Freedom framework to a broad category of fixed income funds and found a remarkably strong relationship between the direction and levels of flows and fees with the level of freedom employed by managers. At the extremes, active and passive funds have both been flow winners. The real challenge is avoiding getting stuck in the middle.
If long-established trends in the U.S. are any indication of what Europe should expect in a post distribution fee environment, then the shift from active ‘building block’ mutual funds to passive funds and ETFs is set to explode.
The days of traditional actively managed ‘building block’ products are quickly waning. Products offering large-part market exposure and an often (very) small-part market outperformance for a very hefty fee are a remnant of a previous era. These funds are in the midst of a perfect storm.
Active investment managers have the opportunity to manage money more freely today than anytime in the last twenty-five years. Considering the proclamations of death and disaster for active management at the hands of the ‘passive’ interlopers, this statement may sound misguided if not an outright misstatement of fact.
Beyond answering the question ‘active or passive?’, investors should be asking what is the significance of the ‘active or passive’ debate for today’s quickly evolving investment landscape? Does the question still matter?