2020 Insights: The Active vs Passive Debate Continues
As well as enjoying the Christmas break, I’ve been putting some time aside for 2020 business planning and it’s got the grey matter whirring. What challenges have the buy-side faced throughout 2019 and how will this continue to manifest itself across the sector in 2020?
What’s resonated with me from conversations this year is the continued inflows throughout 2019 to passive funds and how it’s forced fund managers (big or small) to adapt. I can’t help but think that the active vs passive debate will continue to bring both the behemoths and the boutiques to question throughout 2020. It will make them consider where they position themselves in the market and whether their proposition is something customers will buy.
What's the difference?
Morningstar data has shown that 80% of the funds seeing the highest inflows last year were passively managed. Vanguard’s passive funds frequently top Interactive Investor and FundsNetwork best sellers and even Invesco, who’ve had a challenging time reputationally, saw positive inflows into their passive funds despite their active funds haemorrhaging AUM month by month. With parts of the industry moving towards low-fee (or even zero-fee in some cases) investing, the market now lends itself to big players trying to compete in the low-margin space, whilst active managers are needing to double down on their unique selling point to ensure they genuinely offer a differentiator worth paying for.
Now, I appreciate this isn’t a new debate to anyone in the industry. Since the 2008 financial downturn, investors were burnt by the markets and the gradual flocking towards low-fee index tracked funds has since gained momentum. Given the timing of beleaguered fund managers Neil Woodford and more recently Mark Barnett making the news - whilst other actively managed funds struggled to beat equivalent indexes year on year - it does make me question what scepticism customers have that the dark arts of stock picking are something worth paying for.
“The point I’m making is customers are becoming more demanding and the pressure to adapt is ever-present. If you want to be cheap and offer to the masses, you’d better be cheap. If you want to be a contrarian fund manager who charges for the privilege, you’d better secure those returns!”
The race is on
It’s this thinking which will manifest itself on the ground going into the new decade. The mega-AUM firms are racing for the low-margin business; offering a growing list of products to be the ‘one-stop shop’ at high street prices. Growth in the low-margin space means two things: growing AUM - probably by acquisition and business integration rather than organic growth - and cost cutting/operational efficiency-driven projects. M&A has always been synonymous with headline-news IT and operational integration challenges (not forgetting cultural integration too) while cost cutting will mean strategic decisions have to be made that are often hard to execute. This includes business process outsourcing (BPO), re-defining the target operating model (TOM) and offshoring, to name a few. Innovative product creation will need front office, compliance and legal support which is surrounded by increasing red tape. In short: the race is on but there will be many hurdles.
The boutiques have an exciting but difficult journey ahead too. I’ve had some interesting conversations with CIOs in 50-100m AUM firms of late, who are simplifying their front-to-back office operational and IT footprint (using SaaS offerings where possible) to focus time and money on alpha generating projects in the front office. In my opinion, this is very wise. Clients who truly want bespoke portfolio management and are happy to pay for it want something unique to the aforementioned AUM big players. Honing in on your USP, using proprietary data, developing bespoke research methods, capitalising on the machine learning/ AI boom, all of which allow you to be nimble where tracking an index can’t (Proprietary ESG scoring as a great example). This is what your investors want to pay for.
All in all, the certainty is that 2020 will be an exciting time for the buy-side. With margins being squeezed and investors demanding more from their money managers, competition is fierce. Engaging in well thought out change and transformation is going to be critical to success, whether revenue generating or cost-cutting. As one of the leading organisations in supplying change and transformation personnel in this industry, I’d welcome some healthy discussion so do let me know your thoughts, or feel free to get in touch to discuss your needs on firstname.lastname@example.org. In the meantime, it’s a new decade…let’s get to it!