Can active asset management show its worth in volatile times?
Key Takeaways
- Managers under pressure amid volatility and competition
- Passive asset management attractive for lower fees
- Active strategies can outmaneuver in turbulent times
The asset management industry has faced numerous challenges recently, impacting both active and passive strategies.
Geopolitical crises and health emergencies have created market volatility and uncertainty; combined with environmental, social, and governance (ESG) demands, this has made it difficult for managers to maintain consistent performance.
In addition, the rise of passive investment strategies and low-fee and no-fee platforms has intensified competition, pressuring active managers to justify their higher fees.
Despite these asset management challenges, volatile conditions can present unique opportunities for active managers and set them apart from their passive peers.
Recent asset management challenges
In a report, PwC identifies inflation, market volatility, and interest rate movements as major concerns for investors and asset managers over the next 12 to 24 months. These factors make it difficult to outperform the market and even low-risk deposits and money market funds.
Furthermore, while the use of big data, AI, and blockchain is expected to lead to better outcomes and returns, asset managers find it challenging to meet investor expectations in this area. Regulatory and environmental, social, and governance (ESG) scrutiny is another of the asset management challenges: 60% of managers believe ESG expertise is essential, but finding the right talent is becoming more difficult.
Furthermore, as Goldman Sachs notes in its mid-2024 outlook, the slower-than-expected pace of interest rate normalization is creating a tough environment for asset managers, necessitating a dynamic and active investment approach.
Market structural vulnerabilities, such as liquidity and leverage risks, have become more pronounced in the current economic climate, posing difficulties for asset managers, both active and passive.
Opportunities to outperform passive management
Active managers have the potential to outperform passive strategies by identifying and exploiting market inefficiencies. They can demonstrate their strength by having more control over liquidity and risk than their passive peers and delivering superior returns through strategic decision-making.
This value proposition is crucial in an era when passive strategies are appealing due to lower costs and simplicity. The unique advantages of active management become especially pronounced during crises.
Unlike passive strategies that strictly follow predetermined indices, active managers possess the flexibility to swiftly adjust their portfolios to seize opportunities, avoid potential losses, and implement specific risk-management strategies, such as hedging or shifting to more defensive assets.
Furthermore, having access to extensive research and analysis enables them to make informed decisions to navigate volatility and complex markets.
Looking ahead
Passive strategies, such as indexing tracking funds and a large chunk of exchange traded funds (ETFs), have become increasingly popular among retail investors, driven by greater investment awareness, technological advancements and a rise in investing platforms.
According to Oliver Wyman, as of the end of December 2022, total ETF assets under management (AUM) reached USD 6.7 trillion across the US and Europe, growing at approximately 15% compound annual growth rate (CAGR) since 2010.
This strategy is less time-consuming and provides built-in diversification, as these funds typically encompass a wide array of stocks, potentially reducing risk. Moreover, it minimizes trading fees due to infrequent buying and selling, allowing investors to benefit from long-term, inflation-beating returns through compound interest.
But, like all investment strategies, there are inherent risks. Returns can vary widely year to year, with some years experiencing significant declines. Additionally, the growing popularity of passive funds may lead to inflated asset prices, exacerbating market downturns. Investors must also consider the possibility of achieving minimal or no gains within their investment timeframe, especially if the market takes a long time to recover from a decline.
Against this, several well-known active managers have showcased their ability to outperform passive strategies through dynamic portfolio adjustment.
Overall, asset managers are under pressure from more competition and fee compression in addition to stringent compliance requirements and technological demands from customers. With continued innovation, active managers can enhance their capabilities, making more precise and informed investment decisions. Combined with a dynamic regulatory environment and shifting investor expectations, these developments offer active managers the tools to differentiate themselves and deliver greater value in the future.
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