Miller says that while markets have been relatively buoyant in recent years, absolute return has not produced particularly good returns because the cost of insurance is extremely high in a period of low volatility.
“The costs of providing that certainty has gobbled up a significant proportion of the upside,” he says.
This raises an important point in that while the product mix has grown rapidly during the past decade, the price investors are willing to pay for funds has fallen markedly, boosting providers of passive funds.
Ian Barnard, a founder of Capital Generation Partners, says that while in 2006 around 90% of his portfolios were invested in active funds, that proportion has since fallen to around one-third.
He says: “We want cheap, effective and liquid strategies, and in the future we will be seeing a lot more low-cost hedge fund beta products. Trend following, which has been in the hedge fund world for a long time, has proved remarkably robust.”
Turning to product evolution over the next decade, Barnard points to the leaps forward made in the sophistication of low-cost funds investing in equities, such as factor investing, which have yet to be replicated in the fixed income space.
“Fixed income is still issuance weighted, with benchmarks skewed to the most indebted countries and companies,” he says.
“It is still something we have not cracked. There has been a lot of academic work on understanding equity returns but less so on fixed income. There are no fundamentally weighted fixed income indices or funds.”
Attitudes to the major asset classes, especially fixed income, have undeniably been altered by record low interest rates since 2009. Demand for genuine alternatives that can deliver the twin goals of diversification and income has risen over the past decade.
Alongside the emergence of absolute return and multi-asset, traditional real asset diversifiers, such as property, continue to prove popular.
While issues around illiquidity and gating of bricks and mortar funds that first occurred in 2008 was a huge blow to confidence in the sector, the reccurrence of these problems in 2016 has led to questions over the long-term feasibility of leaving these products open to retail investors.
With the regulator among those keeping a close eye on open-ended funds within the sector, Robin Johnson, head of investments, best of breed, at Nedgroup Investments, is one investor calling for big changes.
He believes the Financial Conduct Authority will follow the legislation introduced in the German market in January 2013, which requires investors in retail open-end funds to hold for a minimum of 24 months and give 12 months’ notice for redemptions.
“This has not, however, weakened the appetite for real estate and has tackled the mismatch between the potential illiquidity of the underlying asset and a desire for instant access, which is no longer an option,” he says.
“In sensible hands, and with the right vehicle, property is a good source of income as the price volatility through any cycle can be ignored by long-term investors.
“At retirement, if you can lock up your money for a number of years and achieve a 3.5% yield, this is very attractive at the moment compared with the 10-year European government bond or an inflexible annuity.”
