“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.
There is one consistency in the sea of change that is the investment management industry: the big continue to get bigger. Globally, there are now 774 mutual funds with greater than USD five billion in AuM – up from 650 at the end of 2007.
The middle is a tough place to be for investment managers these days. Once the lifeblood of large shops, narrow ‘core’ products have lost the interest of investors. The titan funds built in the 1990s and 2000s are in net redemption – well below their peak AuM levels. These funds are now part of a legacy book of business associated with a former era. Now the question for these funds is less about growth and more about retention.
When choosing managers or funds, there is a growing gap between what selectors say and what they do. Their rhetoric covers four ‘Ps’: philosophy, process, people and performance. But their practices too often focus on past performance
Many professional investors will not consider investing in a fund until they ‘see the whites of the portfolio manager’s eyes’ and ‘press the flesh’. Despite all the technological advances that have made remote communication seamless, it is as important as ever to meet in person.