Are active managers worth their fees?

The asset management industry in Asia has undergone big changes since AsianInvestor started in 2000. Having served as the title's founding editor and, more recently, as editorial director at Haymarket Financial Media, I’ve enjoyed a front-row seat. As my final contribution for AsianInvestor, I have come up with a list of what I consider the top five issues facing the industry.

We have already looked at whether asset managers can be 'too big to fail' and pensions and insurers can survive negative interest rates. Here is question number three.

Are active managers worth their fees?
It is customary when the active-versus-passive debate comes up for advocates on either side to politely conclude that, of course, investors should use both types of strategy.

Well, maybe, but the academic studies seem pretty clear: passive is almost always better, on average, net of fees. There are dissenting voices from traditional active players such as Capital Group. Look at us, they say. Yet even giving Capital the benefit of the doubt doesn’t really help: the handful of companies that might credibly claim consistent outperformance can’t manage all the world’s mandates. Nor would they want to.

While this debate is hardly new, it is taking on urgency as too much money chases too few assets – of all types, in all strategies, including private situations, multi-asset funds, and absolute-return products. The world is awash with debt, much of it in securitised form, and much of it public but with private origins. Those assets are failing to perform in an environment of ultra-loose money supply and zero-ish interest rates. In Asia, many institutions continue to amass assets, and private wealth management remains a growth industry – all adding more money to the chase for yield. This must ultimately have an impact on fee structures.

Consolidation is likely to result, which in turn raises the prospects of huge asset managers being subjected to greater regulatory scrutiny (see story Can asset managers be 'too big to fail'?).

Passive players will face their own problems, though. How much of the market can they absorb before they develop problems? It’s one thing to track the market, but another to be the market, from trading, operational and regulatory perspectives.

The rise of exchange-traded funds are also at risk of being overdone to excess. ETFs exist on the promise of liquidity, and liquidity is an illusion – it's not there when you need it most. ETFs in the US junk bond space have already experienced problems when they faced short-term redemptions. As ETFs get bigger, extend into inappropriate asset classes and morph into complex, synthetic structures, the odds of a failure, including a failure that has systemic implications, will rise.