Cover story – Active management
funds failed to beat their passive counterparts, net of fees, while around half of large cap equity funds managed to do so. There are exceptions to this trend. For emerging market equi- ties, European equities and US real estate, actively managed funds generally delivered higher levels of outperformance, ac- cording to the data provider. “The Coronavirus sell-off and subsequent rebound tested the narrative that active funds are generally better able to navigate market volatility than their index peers,” says Ben Johnson, Morningstar’s director of global ETF research. “Active funds’ performance through the first half of 2020 shows that there’s little merit to this notion. “Across the 20 categories we examined, 51% of active funds survived and outperformed their average index peer during the first half of the year,” Johnson adds. This ties into a longer-term trend. Over the past 10 years, less than a quarter of actively managed funds outperformed their passive rivals, according to the data provider. But the end of the year appeared to be a turning point for active fund managers. They reported their strongest inflows for more than five years, says Calastone, a data provider. This, says Edward Glyn, Calastone’s head of global markets, was driven by buoyancy over the impact of vaccinations. “The growing optimism that characterised the end of 2020 is reflected in the renewed appetite for active funds. Index funds are cemented into monthly savings plans and are now the default choice for most investors, but at moments of rising spirits and increased risk appetite, active funds benefit dispro- portionately as investors scour their fund ranges to find the one that meets their needs,” he adds. In November alone, investors piled some £6.5bn into UK funds, out of which £4.6bn went into UK-domiciled equity funds. However, this picture is somewhat distorted by local government pension scheme pool Access launching a Global Alpha Equity fund, which accounts for £1.6bn of those inflows.
Precipice of change
Whether the short-term optimism we saw towards the end of the year can be sustained remains to be seen. But while active management might not make the dramatic comeback some asset managers might be hoping for, it is noticeable that the gradual decline of actively managed funds in institutional port- folios appears to have slowed down. In the past two years, the overall proportion of active mandates for pension schemes, insurers and charitable foundations has remained stable, according to Mercer’s asset allocation study. Larger schemes tend to stick with active managers. Indeed, schemes with more than €2.5bn (£2.2bn) of assets typically have most of their alternative assets managed actively, holding
18 | portfolio institutional | February 2021 | issue 100
on average around 12 such mandates. Smaller schemes, how- ever, typically favour an active approach to equities, Mercer’s survey shows.
This raises the question of why schemes have not given up on active management, despite sustained challenges. One expla- nation might be growing awareness among investors that the extraordinary levels of monetary support shown by central banks and governments has to end at some point. Mark Hedges, chief investment officer at the Nationwide Pen- sion Fund, says many investors are aware that the global econ- omy could be on the precipice of change. “We’ve had a very strange past 10 years where markets have essentially been underpinned by central banks and fundamentals were no longer underpinning valuations.
“If we look at factors such as the rise of tech, where a lot of it is being driven by retail flows, and as central banks start to retrench, I suspect that there will be some people that will take the view that we are going to see a mean reversion for value stocks, for example,” he adds. But Hedges stresses that the decision on whether to keep faith in active management or not also depends on the scheme’s life cycle. For his own fund, where he manages some £5.8bn and is set to close for further accrual in March, he has had to make some drastic decisions by completely cutting out active man- agement from all public market strategies.
“Eight years ago, our entire public markets portfolio was actively managed. In 2013 we switched our developed markets portfolio to passive funds,” he adds. “We kept our emerging market portfolio actively managed because we still saw some opportunities for out-performance. But over a four-year period, all those funds underperformed net of fees. “It could be argued that we may have chosen the wrong man- agers, but we had three different managers following very dif- ferent strategies, from growth to value. They were recommended by our advisers and we spent a lot of time doing due diligence. Even with that, they failed to outperform. “As a pension fund that is closed to further accrual, we would find it very hard to convince trustees of actively managed strat- egies at this point. That is also a function of where we are at in our life cycle as a pension fund. It might be different for defined benefit (DB) schemes which are still open to further accrual,” Hedges says. Having said that, the scheme has not fully given up on active management. Instead, it has opted for a relatively high alloca- tion to private markets, across debt and equity. Around half of the scheme’s return-oriented portfolio, some 20% of its overall assets, is invested in actively managed private market strate- gies. This ties in with the trend of larger schemes opting for an active approach to their alternative strategies. In contrast, David Stewart, chief investment officer of the Brit-
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48
