Active managers need to justify the fees they charge in order not to be pushed out by passives, according to ETF Securities’ Howie Li.
Li heads up the group's Canvas platform, which enables asset managers to build Ucits compliant ETFs. He told Citywire Selector that active managers will always be around, but that they need to do more to prove their worth.
‘The asset management industry will always have active managers, it’s always going to have traditional market cap passive products – but there will be continued development and innovation and everything in between.
‘There are many skilled managers in the industry who know how to picks stocks in less efficient markets. But also there are some markets where the data availability is lower than others. Therefore active managers maybe have a higher understanding of a market or sector giving them a leverage on passive funds.’
As society increases in the amount of data that it produces and that is available, Li said managers have been able to use the data consumed to help provide new innovative strategies.
‘This is why we are seeing so much development in smart beta and quant based investing. But as long as the active managers are able to demonstrate that the additional fees charged are justified by the access performance they are able to generate, they can continue to exist alongside passives.
‘Performance for some can be reducing risk as well as investor returns. Having passive benchmarks to essentially track the market is also very helpful. Active management will continue to exist but the space will become more focused, there will be more concentrated portfolios, less investing close to a benchmark and more development in the thematics space.’
Innovation on the up
It’s this innovation and development that Li believes will become more common place in the traditional asset management space.
‘If you look at what active managers are saying around asset classes like fixed income, they are actually welcoming more innovation – especially in relation to alternatively weighted products and smart beta. Many active managers are working towards this in both the active and passive space.’
ETFs have become more and more prominent, with active managers slashing fees on many of their products as price remains a conflict of interest. But Li said the hype around the market being overcrowded is ill informed.
‘Any comment about overcrowding is really the tracking of the market cap benchmark. The issue with so-called overcrowding is that all ETFs track the same market cap benchmarks.
‘Let’s say there is illiquidity or congestion, there can be concerns as everyone is chasing that buy or that sell and you can imagine any kind of movement in the market would create a volatile reaction.’