PA ANALYSIS: Active managers ‘cannibalising’ themselves to survive passive resurgence

Passive rivals have forced active managers to focus more on fees than ever before. But are active managers biting off more than they can chew by getting into smart beta?

PA ANALYSIS: Active managers 'cannibalising' themselves to survive passive resurgence

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It’s no secret that active managers have been feeling under attack since the renaissance of the passive funds industry has taken hold.

Passives have been around for a while, the first prototypes were introduced in the ’70s, but in the new era of ‘lower for longer’, they have taken off in an astronomical way.

Last month, assets in exchange traded products sailed past the $4trn mark globally.

Meanwhile, in 2016 traditional mutual funds saw their lowest level of new business inflows globally since 2012 and collectively, saw their profits dip close to 3%.

This has forced a number of the big players down the passives route.

For many, smart beta products have seemed like an obvious choice because of their low cost appeal and the opportunity to differentiate the vehicle from a basic index tracker.

If you can’t beat ‘em, join ‘em, right? Well, as it turns out, it’s not so simple.  

An Alliance Bernstein report, seen by Portfolio Adviser, asserts that investing in smart-beta for the sake of it is not a winning strategy long-term for active managers.  

One of the principle drivers of the stock prices of listed fund groups is assets under management, most likely a symptom of the fact that many firms have a fee structure based on AUM%.

“However, in a world where passive is growing and the active-passive distinction is being blurred by smart beta products, which themselves are seeing a halving in fee each year, this is a particularly invidious dynamic,” said Alliance Bernstein.

Coming up with your own smart beta products might seem like a rational response, the firm continued, but in many cases, this process entails repackaging intellectual property at a lower cost, which isn’t a commercially viable solution.

A strategy that previously sold at 80bps now retails for 20bps. “That only ends one way,” the asset manager cautioned.

Furthermore, by launching lower margin products in the pursuit of AUM, asset managers are essentially cannibalising themselves, Alliance Bernstein explained.

“The margin of the industry is already under pressure from the rotation from active to passive, but in chasing AUM rather than profits, the asset managers are likely to accelerate this contraction in the margin through a process of cannibalisation.”

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