Shaping the Future of Active Management
Renowned portfolio managers discuss how active managers can differentiate themselves from passive competitors – and how they can meet clients’ new demands.
- Pooneh Baghai, Senior Partner and Global Leader, McKinsey & Company
- Bruno Crastes, Chief Executive Officer, H2O Asset Management
- David Herro, Deputy Chairman, Portfolio Manager and CIO, International Equities, Harris Associates
- Chris Wallis, CEO, CIO and Senior Portfolio Manager – Equity Investments, Vaughan Nelson Investment Management
- Moderator: Professor Amin Rajan, Chief Executive Officer, CREATE-Research
While panelists at the Natixis Investment Managers Summit recognized that passive management has gotten the upper hand in the last decade – in part due to high liquidity and low volatility – they believe a shift to active management will occur in the near future.
Passive and Active Can Coexist
Passive and active management can “coexist as yin and yang,” Rajan said. Why? Because inefficient markets create opportunities that can be exploited by active managers, which in turn creates less volatility, thereby favoring passive investors. Conversely, investment decisions made by passive managers are often unrelated to market fundamentals, creating new inefficiencies for active managers.
“I do not view passive as a threat. I view it as a benefit,” said Chris Wallis, CEO, CIO and Senior Portfolio Manager of Equity Investments at Vaughan Nelson Investment Management. “It allows me to be more active. The inherent issue with passives is they are time-dependent and not price-dependent and so they are not focused on price discovery. They are focused on making a move at a specific point in time, regardless of underlying fundamental value, and that is okay.”
The panelists stressed the advantages of active management today. Pooneh Baghai, Senior Partner and Global Leader, McKinsey & Company, explained that in a volatile world active managers “can earn their keep.” Similarly, Wallis said that as an active manager, “volatility is my friend.” And David Herro, Deputy Chairman, Portfolio Manager and CIO, International Equities, Harris Associates, said that without the inefficiencies created by passive management, “I don’t have a field to play on.”
Active Managers to Ride the Next Economic Wave
If central banks tighten monetary policy as expected, the reduced liquidity should favor active management. “Active managers are like longboard surfers who try to find a wave and ride it,” said Bruno Crastes, Chief Executive Officer, H2O Asset Management. Until recently, the central banks had been trying to calm the waves.
Currently, the economy does not suffer from excess in most key economic fundamentals, such as labor, so “the next recession” will not be centered on them, Wallis said. “We have excess liquidity, so that is what we’re going to ‘recess.’”
Time, Trust and Transparency
Active managers work in a different time frame, and clients need to understand that. “As a value investor, I have an extremely long time horizon,” said Herro. “The active manager needs to be upfront about that and communicate it.”
When asked about dwindling trust in asset managers, Crastes pointed to fees as one of the issues where investors often feel frustrated. “The experts understood very quickly that it is difficult to deliver returns,” he said. “There was lower volatility and lower returns, but not lower fees.”
Panelists agreed that active managers should be rewarded for coping with volatility and providing better returns. “I do not want a free ride. I do not want a free lunch,” said Wallis. “I would love to see fee alignment.” Yet movement in that direction is slow.
“Every Request for Proposal asks if you are willing to align the fees to the outcome,” said Baghai. “The uptake is low.”
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Active management (also called active investing) refers to a portfolio management strategy where the manager makes specific investments with the goal of outperforming an investment benchmark index.
Liquidity refers to the ability to convert an asset into cash quickly, with minimal impact on the price received.
Passive management (also called passive investing) is an investing strategy that tracks a market-weighted index or portfolio.
Volatility refers to the range of variation in the value of a security.
A request for proposal typically includes background on the issuing organization and its line of business. The request sets out specifications describing the solution it seeks and evaluation criteria disclosing how proposals are graded.
Speaker opinions may not necessarily be those of Natixis Investment Managers. Not all speakers are employed by Natixis Investment Managers, but may receive compensation for their services. Content should not be considered a solicitation to buy or an offer to sell any product or service to any person in any jurisdiction where such activity would be unlawful.
The Natixis Investment Managers Summit was hosted by Natixis Investment Managers. Natixis Investment Managers includes all of the investment management and distribution entities affiliated with Natixis Distribution, L.P. and Natixis Investment Managers S.A.