Outperformance Increasingly Difficult
And outperforming is only getting harder, because the world of investing is no longer dominated by small, retail investors trying to figure out what to do with their money. Today 68% of assets are professionally managed (up from 17% in 1963).
Professionals are trying to outsmart each other, making competition in the search for outperformance tougher and tougher, Rampulla says: “High cost and low performance makes active management tough. Money is leaving the active industry, and it’s accelerating.”
The Evolution Of Active
The new face—or evolving face—of active management can be seen in three booming trends.
- The first is low cost. Traditional active managers have cut their prices a lot to have a chance to outperform. Active managers who are not saddled by high fees do better. “Low-cost active can work,” Rampulla said.
- Actively managed passive portfolios is another evolution. It’s using passive ETFs actively. This is a growing phenomenon that, at least according to Morningstar data, already comprises some 370 ETF managed portfolios with $88 billion in 2016.
- The third face of active management is factor investing. Up to 80% of active excess returns can be explained by factor returns, research shows. Factors can be a very efficient way to get alpha, and can be crucial in making a difference in manager outperformance. They can also be harnessed directly via ETFs by investors, and be used both strategically and tactically. “Factor investing is active management, and it’s growing rapidly,” he said.
“So is active management dead? No. But old active is unlikely to survive. It needs to evolve to survive,” Rampulla said. “Lower-cost, actively managed passive portfolio, and factor investing are three evolutions in active management.”
Contact Cinthia Murphy at [email protected]