Money managers under the microscope
The days when active managers could ride a market rally and charge high fees for doing so could be drawing to a close. Passive managers are hoping to paint their active rivals into a corner by delivering better than market returns at a lower cost. The development of so-called “smart beta” products based on non-traditional benchmarks is expected to force active managers to sharpen up or get out of the game.
Fundamental indices, which use a variety of criteria to weight stocks, and minimum volatility indices, are beginning to gain traction with institutional investors. The latter, developed by MSCI for fund firms running managed volatility strategies, aim to deliver close to market returns but with about a third less risk, giving a better return per unit of risk, thereby improving the overall efficiency of an institutional investor’s portfolio.
BlackRock’s head of index equity, Eleanor de Freitas, said that to date investors were dipping a toe in the water, using these types of index as a complement to their core passive portfolios. “All our client queries at the moment are from existing index clients. We don’t view these products as an alternative to active investing,” she said.
But with exchange traded funds also gaining in popularity – Lipper FMI data show that in the first half of 2010 they made up 40 percent of net sales in equity investments (see below) – it looks like the writing could be on the wall for active managers that can’t actually outperform.
from Global Investing:
Hundreds or even thousands of "active" fund managers are competing to add alpha to beat benchmark indexes, be it in stocks, bonds or alternatives.
The market is so efficient, historical performance is no guide to the future. It's nearly impossible to find a reliable method to pick advisers who deliver the best industry returns year in and out. There are also costs, from visible ones such as management fees and custody and administration expenses to "below water" costs such as trading commissions (due to higher turnover), bid/ask spread (price to buy, another to sell) and market impact costs (larger buy/sell orders affecting price).