Reports about active management's death have been greatly exaggerated — but managers still have their work cut out for them.
The was one of the key messages during a general session titled The Future of Active Management:The Debate Continues
moderated by John Thompson
, partner, head of investment solutions at Hewitt EnnisKnupp
, and held during the MMI Spring Conference
held at the Hilton New York in Midtown Manhattan.
Other members of the panel included Ed Foley
, director, Dimensional Fund Advisors; Brian Hansen
, president and chief operating officer, Confluence Investment Management
, and Robert Smith
, president and chief investment officer, Sage Advisory Services
During the discussion, Smith declared that the active space "has a tough sell at this point." Most managers, he noted, have a tough time beating their indexes.
"Stock selection is definitely a tough game, it continues to be a tough game. Fixed income did better, but we know what lies ahead. Equity managers tend to be better in rising markets," he said.
Foley said that this is "not to say there isn't skill out there, but the challenge always is, can you identify those managers who are ahead of the pack who can build a portfolio."
"Given the broad array of advisors out there, how do you know who has the skills? What are the expected opportunities in the marketplace?" he said.
Smith said that the industry is undergoing a major rethinking of definitions, and focus.
What are the long term aspects you are focusing on? Active, solution seeking, tactical asset allocation, using ETFs. The hot buttons going forward will be global tactical asset allocation, total return, multi asset income is definitely here to stay. Core plus executed through ETFs on a much more opportunistic basis. Defensive short-term cash management, is looking out to be one version of the future. Liability driven solutions. We have to focus on the fact of why people save money. There is an end-game and it is called an expenditure.
He added that "All the academic studies tell you that stock selection, it is a losers game, trying to pick stocks all the time. Sector rotation is a much friendlier place for a smaller manager to be."
Regarding his firm, Smith said "We are not huge, we have to think about
macro top down management is what we do. The best way to do that is picking the right segments of the market we think will do well for macro-economic reasons on a 2 or 3 or 4 quarter basis."
ETFs, he said, "allow us to do that efficiently."
Hansen remarked that "in the ETF side, the proliferation of products has really helped in terms of implementation. There are lot of tools to choose from now, he said. For example, fixed income ETFs has made it easier to target durations or credit in a portfolio, to have the right mix. ETFs have also made it easier to add commodity exposure."
However, Foley warned the proliferation of new products has increased the responsibility to ensure that advisors use them properly. A lot of education is needed for advisors regarding these products.
"There is a lot of new stuff out there," he said.
These products can be very easily misused, Foley said.
Smith said the switch to ETFs is "real, it is tangible," and he likened it to the moving from "analog to digital technology."
And like it or not, he said, ETFs have had a tangible impact on costs in the industry.
"We don't have too many products that have led to cost advantages. This innovation has brought cost innovation to investors."
One downside, Smith warned though, is that there may be too much liquidity, such that "it is too easy to get into the cano with everyone else."
Warning that it has become too easy for a manager to load up on a particular asset category, managers could get caught if "there are alot of people on the canoe and they all rush for the door when it upends."
Toward the end of the session, during Q&A, one audience member brought up the subject of Jes Staley's
presentation from yesterday, during which he said that larger firms now have scale advantages.
In response, Hansen said that sizes matters and scale helps, but "it does get difficult to turn around a battleships."
He said that if a firm keeps the business and portfolio management in synch, they can avoid the mistake of growing too big in the future.
"For the sake of good returns of our clients, we do need to be able to cut off," he said.
Smith, meanwhile said, that firms still need to pick their markets, and that if given a choice between a giant firm, but gaining access to only a fourth tier sales rep, or going with a smaller firm and having direct access to the PM, many clients will turn to the smaller firm.
Foley, who noted that his firm was launched in a Brooklyn brownstone in 1981, said that a firm's greatest asset will always be its human capital and taht great opportunities still exist for small firms.
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