Part of our series of articles celebrating IFA Magazine’s ten year anniversary, Aymeric Forest, Global Head of Multi-Asset Solutions at Aberdeen Standard Investments, details the outperformance of active management by passive management in the investment industry over the past decade, and speculates that this may again change for the next one.
“Over the last 10 years our investment industry experienced substantial changes driven by market events. A 60% global equity/40% domestic bond mixed strategy delivered double digit returns on average per annum over the decade helped by unprecedented monetary and fiscal policies. Such strategy passively managed using ETFs outperformed active equivalent at a low cost. It is therefore no surprise that advisors relying on external manager selections, for example, lost faith in active management. The financial regulator implemented RDR rules and recently raised concerns about the value for money of some actively managed strategies. In 2019, the amount of passively managed equity funds in the US surpassed the active ones. A milestone in this epic battle. Asset managers had to adapt to such rapid transformation with eroding margins. Large investment in technology have helped streamline processes, generate new sources of alpha through AI, or offered clients new, bespoke, and user friendly experience to manage their wealth or pension including robo advisors.
“The next decade may be different driven by changes in technology, demographics, policies, and climate, all likely to contribute to new imbalances as asset risk premia contracted. A 60/40 may not offer the same returns. Active managers are outperforming again as return dispersion within asset classes increase. A major energy transition is underway that will generate significant investment risks and opportunities as an ESG dimension is increasingly being added to the return and risk objective of a portfolio. The demand for bespoke, outcome based and user friendly experience for investors will continue. Asset managers will extend their role beyond asset management, help their clients manage extra-financial risks, find better ways to diversify their portfolios and achieve their outcomes through targeted multi public and private asset solutions. This is more than passive investing.”