Some analysts remain bullish on the future of active management in a rapidly evolving financial world. Chip Roame is not one of them.
Technology, investor awareness and passive options are just some reasons why active management will continue to suffer a loss of relevancy and business, said Roame, managing partner of Tiburon Strategic Advisors.
“It’ll continue to underperform over the long haul,” Roame said during a conference call Thursday. “That doesn’t mean there’s no good active managers. It just means in the big scheme, the business model of active management doesn’t really work. And its price point is too high.”
The investment world remains divided by the tension between traditional active management and alternatives led by passive, or index, investing represented by low-cost target-date or exchange-traded funds.
Active management continues to lose dollars in a trend toward passive that dates to John Bogle introducing index funds through Vanguard decades ago. Yet, some believe active management will, if not come all the way back, at least hold its place in the investment market.
Eighty-nine percent of Tiburon CEO Summit attendees say active management will either rally back to the lead (30%) or fall behind passive but hold its own (59%) in a recent survey.
Roame agreed with the 11% who said active is “doomed,” up from 3% last year.
“I think active management is in trouble,” he said. “It’s going to continue to be in trouble.”
Sharp cuts to fees is serving to make active management a fair proposal, defenders claim. But Tiburon data shows more than two-thirds of actively managed equity open-end mutual funds underperforming their benchmarks.
‘Ginormous Cash Flows’
One positive for active management is the amount of money it controls. Actively managed open-end mutual funds controlled $13.9 trillion in assets in 2019, Tiburon reported. That figure is up from $11.2 trillion in 2018 and $2 trillion in 2005.
“Because they will generate so much cash flows off of this big base of business, even if the business declined, they’ll still generate ginormous cash flows,” Roame said. “They’ll be the big acquirers of other businesses.”
With the power of those dollars behind them, active management could push their way into and lead other investment fields like tech or socially conscious funds, Roame said.
He cited Eaton Vance as an investment firm that is evolving with the times. As The Motley Fool noted in this November column, Eaton Vance is investing in new technologies and restructuring to build on its competitive advantages in direct indexing, a trend that’s gaining ground in the world of asset management.
The Boston-based investment firm announced a plan in June to rebrand the company’s individual separately managed account business under the banner of Parametric Portfolio Associates. Parametric’s proprietary technology allows clients to create their own indexes to fit their investment needs.
“Eaton Vance does seem to be very savvy,” Roame said. “They understand they’re in a declining market, but they’re taking their cash loads and investing them in the growing markets, so good for them.”
So if active management goes away, what do advisors do? Become financial planners, Roame said — real financial planners.
“I giggle sometimes when advisors say they do financial planning,” he said. “Really all they do is a couple of questions get you to a pie chart for asset allocation. I call that investment planning. I don’t think they do much financial planning.”
While there are certainly financial planning opportunities in the high-net-worth market, Roame said the middle-market investors need it most. Especially in three areas: Social Security, healthcare and longevity.
“For the mass affluent financial planning, it’s very simple,” Roame said. “It’s retirement income, health care and longevity. You got to solve those three problems.”
InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 year s of daily journalism. John may be reached at email@example.com. Follow him on Twitter @INNJohnH.
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