Active fund managers are facing intense pressure to perform and to lower their fees as investing institutions' increasingly look to passive alternatives and take some portfolios in-house.
In Australia’s highly competitive funds arena, the question remains: How long can traditional active managers survive, given historical data showing very few are able to maintain a consistent performance over an extended period?
Among the actively managed international equity, bond and real estate funds with a 12-month top-quartile performance in Australia as of June 2020, not a single fund maintained its top-quartile status over the next two 12-month periods, according to S&P Dow Jones Indices research released this week.
The S&P research shows that, regardless of asset class or style focus, active management outperformance is typically relatively short-lived, with few funds consistently outranking their peers.
Over a five-year horizon, “it was statistically near impossible” to find consistent outperformance, S&P Dow Jones Indices said. That raises the issue of whether active management is viable, at least for those with plain vanilla strategies.
The problem for asset managers is that margins are tightening as asset owners press their external managers to deliver consistent alpha.
Alex Zaika, managing director at GAM Investments Australia, says active managers can maintain their fee margins in the face of rising competition from exchange-traded funds (ETFs) and other passive products, but only if their strategies are sufficiently differentiated.
“The general trend for fees in products that can be easily replicated, like large cap equities, is down, but fees in alternatives and private markets have remained steady, because investors are willing to pay for manager expertise,” he told AsianInvestor.
“The Australian market is incredibly competitive and mature,” a senior investment strategist at one of Australia’s biggest domestic fund managers told AsianInvestor. “I think we have the fourth-largest investment pool in the world, due to our compulsory superannuation.”
As funds grow larger through mergers and consolidations in the superannuation industry, they tend to move towards indexing for equities and fixed-income out of necessity, the strategist said. “And they will aggressively cut their costs to compete on price [to scheme members]. This means, in a nutshell, that in the institutional market, there are fewer opportunities, and they don’t pay anywhere near what you could get for the same mandate anywhere else in the world.”
The strategist said managers of real assets and specialists were the exception to that rule.
The full extent of negative sentiment towards active funds is shown by a $15 billion outflow over the last 12 months, according to new research on Australia by data provider Broadridge. That wealth has exited largely from equity and mixed funds, and contrasts with an $8 billion inflow to ETFs.
Index fund giant and Australian market heavyweight Vanguard is likely to consolidate its dominant position following the launch of its own superannuation fund range last month. Vanguard claims management fees for its default fund option will be the lowest in the Australian superannuation market for younger members and investors with balances under A$50,000 ($33,080), according to analysis by accounting firm Deloitte.
One by-product of the public market downturn is that some investors are looking at ways to increase their active risk, or the risk involved in efforts to outperform the market. Australia’s Future Fund is among those looking at their total portfolio exposures and assessing the strengths and vulnerabilities of each asset class, adding new strategies where necessary.
Others, such as UniSuper chief investment officer John Pearce, are sitting on cash and awaiting a moment to strike.
“In calendar 2022, the only option at this point that's recording a positive return is cash – it’s been the only place to hide,” said Pearce. “All growth options are currently recording negative returns. The last year has been pretty terrible, but a correction was somewhat inevitable.”
“We've still got a lot of dry powder in the event that markets fall even further, and we’re seeing opportunities across the whole curve,” he said.
In the meantime, Pearce is finding opportunities with bank debt.
“We’re picking up over a billion dollars of major bank paper at around 6.5%,” he said. “These levels were around 2.3% not that long ago. There are some excellent opportunities in unlisted assets.”
In November, UniSuper acquired a majority interest in PRP Diagnostics, one of Australia’s biggest diagnostic imaging providers. The investment is the first deal for asset manager IFM Investors' Long Term Private Capital Fund, and was anchored by UniSuper and Hostplus. The Long Term Private Capital Fund is focused on the technology, business services, healthcare, waste, consumer staples and logistics sectors.