The greatest threat to the future role of professional fund investors is not robots or regulators; it is information overload. There are tens of thousands of unique funds available for investment.
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.
If thick German philosophy is your thing, then here is a thought for you: the history of the investment management industry is moving on a course satisfactorily expressed in the terms of Hegel’s dialectic.
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.
Against expectations, fund investors are more trusting of fund managers than they were before 2009. This trust is not evenly distributed and seemingly needs to be earned.
Multi-asset funds are a double-edged sword for professional fund investors. Their flexibility and lack of constraints offer the full potential of truly active management.