The hunt for returns has made active asset management more popular than in recent years as markets have turned more volatile, a study shows.
As perhaps is inevitable after a year (2018) when markets tanked, “passive” investing has lost some charm.
A study by Natixis Investment Managers, the international group, has polled 200 fund buyers who are responsible for selecting funds included on private bank, insurance, fund-of-fund and other retail platforms. It finds there is a clear preference for active fund management – an approach that has been on the back foot for the past decade.
Three-quarters of respondents said alpha – above-market returns - is becoming increasingly tough to obtain as markets become more efficient, and they are willing to pay higher fees for potential out-performance. They say the 2019 market environment is likely to be favourable for active portfolio management, Natixis said about its study, which was conducted by CoreData Research in October and November 2018 when markets were turning sour.
“If the active versus passive debate doesn’t look set to disappear, fund buyers are increasingly seeing the long-term value that can be generated by active management. A large proportion of global fund buyers (62 per cent) agree that actively managed investments outperform passive portfolios in the long run, with 72 per cent of portfolio investments being actively managed, a share which they expect to remain relatively constant over the next three years,” Matthew Shafer, head of global wholesale at Natixis Investment Managers, said.
“Even in their passive holdings, over half (55 per cent) are allocating more to smart beta than they were three years ago, which confirms that global fund buyers are diversifying traditional passive positions into other strategies,” Shafer said.
Fund buyers don’t want to make large asset allocation changes this year. Equities and fixed income remain the most popular asset classes by a large distance. However, fund buyers intend to trim their overall equity allocation by 1.2 percentage points to 43 per cent (down from 44 per cent in 2018). They also plan to increase weightings in alternatives (+19 per cent in infrastructure; +15 per cent in private debt; +17 per cent in real estate) with 70.1 per cent of overall alternative allocations being made into liquid assets. Alternatives are seen as valuable tools to help meet performance objectives, manage risk and diversify holdings, Natixis said.
Despite ongoing geopolitical and economic uncertainty and a persistent low return environment, more than eight in ten (82 per cent) believe that their return assumptions for 2019 are realistically achievable. However, they have reduced their long-term rate of return assumptions to an average of 7.7 per cent, down from 8.4 per cent in 2018.
Backing up evidence from widespread market commentary and some industry action, the report also showed that environmental, social and governance-driven investment ideas are becoming more mainstream. Some two-thirds (67 per cent) of fund buyers surveyed said they agreed that including ESG factors will be standard practice for all investment managers within five years. Half (49 per cent) said ESG factors are important in their organisation’s current manager selection process, and two-thirds say they will increase their allocation to ESG strategies in 2019.
More than half (57 per cent) contend that there is alpha to be found in ESG investing. Fund buyers are increasingly incorporating ESG considerations into investment decision-making and analysis to align investment strategies with their organisational values.
However, their concerns include the conflict between short-term return goals and long-term sustainability objectives, a lack of demonstrated performance track records and fears that companies may be “greenwashing” to enhance their public image, Natixis added.
Natixis, based in Boston and Paris, oversaw $917.1 billion of assets under management as at the end of December 2018.