Semi-Active Vs Passive: A New Battle

June 30, 2014

Active managers are bringing to market so-called “semi-active” funds in a new fight to retain clients as low cost passive funds and even hedge funds squeeze the competition, new research has found.

A report published last week from global consultancy Deloitte found that “semi active” funds, which focus on lower costs to provide alpha through semi-automated processes, are the new competition for passive funds and hedge funds, which are both seen to be lowering their charges.

The Deloitte report, “Seismic shifts in investment management”, is based on research and interviews with 11 UK-based senior asset management executives between January and February this year.

It found that investors in active funds are now choosing between low cost, semi-active funds and higher cost, hedge fund type strategies, as the third category of plain “index-plus” active fund fees of 1-2 percent are hard to justify. This is considering that the average price of an S&P 500 exchange traded fund is just 0.09 percent.

Investors would need to be careful not to confuse semi-active funds with closet index trackers, which essentially means paying a manager high fees to track an index.

The report discovered that semi-active funds have had “limited success”.

Fundsmith’s semi-active UK equity fund, which invests in high quality companies with low turnover for an annual management charge of 1 percent, has reached over £2 billion in assets. However JPMorgan Asset Management’s UK Active Index Plus Fund has £88 million in assets, while the Schroder UK Core fund, which targets 1 percent outperformance of the FTSE All Share index, net of fees, has just £16.2 million assets. It costs 0.4 percent.

According to the Deloitte report and the Investment Management Association, 22 percent of managed funds are passive and 78 percent are active, and traditional active management is unlikely to lose out to passives very quickly due to investors’ optimism in managers’ skill to avoid losses.

Henderson Global Investors’ head of global distribution Phil Wagstaff believes retail managed funds will shift to around 40 percent of portfolios in the future.

Interestingly, the report also outlined that traditional fund performance benchmarks may be replaced with specific objectives, thanks to the trend of outcome-based products.


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