In the face of a challenging market environment, active management is more relevant than ever but it requires a laser focus to both deliver to clients and stand out in a crowded consolidating market, according to Allianz Global Investors chief executive Andreas Utermann.
This follows Allianz’s ‘Active is: Regaining trust in active management’ study, which surveyed 490 institutional investors and revealed that there is a lack of faith in active managers to perform long term and deliver a value for money service.
Carried out anonymously, just 23 per cent of respondents believe that actively managed portfolios were worth the cost, leaving 77 per cent feeling a disparity between managers’ price and performance.
Second to this, only 36 per cent said active strategies are more likely to outperform passive in the long run over full market cycles, with those in the UK being the most sceptic as only 18 per cent here believed in an ability to consistently outperform.
Active funds’ underperformance in recent years
Source: FE Analytics
“The biggest challenge in many ways, and the most sobering one. That the trust our clients have in the ability of asset managers to perform adequately is very low. Clients are convinced that the markets don’t provide much alpha; half of them believe that active strategy has a downside connotation in volatile markets,” Utermann said.
“Investors appreciate that active asset management has advantages over passive. Yet many remain unconvinced that these benefits are worth the cost. They recognise the strengths of active, but not necessarily its value.”
This value for money debate has been has been running in the fund management industry for some time.
Orbis Investments’ Dan Brocklebank recently told FE Trustnet: “Active managers need to start delivering better value for money to investors as they reach a point where fees can no longer be cut in their battle with passive fund houses.”
The concern over the value of investing in an actively managed fund is not down to investors simply wanting a cheap option.
When asked in the survey what would be one of their top three priorities when selecting a fund manager, only 6 per cent put fees as one of their primary concerns.
The concern is not over cost, because according to the survey investors don’t confuse value with cost. They’re willing to pay for a service that brings clear benefits, aligning price with performance.
Institutional investors’ top three priorities when selecting a manager
Source: Allianz Global Investors 2019 Institutional Investor Survey
According to Allianz’s research almost half (43 per cent) of institutional investors feel that current fee structures do not meet their objectives, with 68 per cent saying that they would prefer fee structures that adjust according to performance.
This factor is so important that over half (68 per cent) said that they would switch to managers who were offering more innovative, better aligned fee structures.
“What is interesting to point out is that not 68 per cent of our clients are on performance fees. Whilst there’s a lot of runway still for there to be a change, at least conceptually clients believe that’s the best way to do it,” said Utermann.
“Performance fees are one of the ways you can combat a pro-cyclicality incurrent with the buying and selling mechanisms and processes of the asset management business.”
Allianz’s research suggested that there is a definite appetite for newer, flexible fee models more aligned with performance and pricing. One possible pricing option is allowing an investor to pay a performance fee once a fund’s underperformance has been rectified.
This approach, Allianz said, could offer incentives to buy into funds and strategies with potential for future returns, rather than just favouring products that only recently performed well.
In reaction to these findings, Utermann said: “The way we thought about it, with every challenge there’s an opportunity.
“Only active management can provide the type of tailored, bespoke solutions needed to meet many of the investor challenges identified in our report around disruptive technology, innovative fee models and ESG.
“Active is what we do. Passive investment is increasing in volume and there doesn’t seem to have an end to it, so why aren’t we hedging our bets by diversifying away from that? It’s our ethos. It’s how we believe we can best serve our clients and that’s why we’re single minded focused on it, but we’re going to keep coming back to this theme.
“We have a very clear value proposition. Aligning pricing with performance is very important to buildings those client relationships over time.”
The research unveiled a major gap in the relationship between investor and fund manager, according to Utermann, who believes one of the biggest failures of the asset management industry over the past 30 years has been managers failing to connect with clients on an emotional level.
This combined with an ill-aligned pricing point directly feeds the growing distrust in fund managers’ abilities to deliver.
But Allianz feels that this gap between client perception and behaviour can be bridged. “Creating a collaborative relationship, building value through tailored service and concrete support,” the report said.
“Active management is not just about beating the benchmark it’s about active device, it’s also engaging with clients and finding out what they need and that’s an area that they’re really keen on.
“Managers in the past have far too often focused on individual sleeves. Whereas if you focus on understanding the client’s objectives, their structures, their challenges, their assets requirements, then you really understand that they need a much broader variety of asset classes and services from their asset managers.”
In the climate of fluctuating market conditions Allianz concluded that: “Investors want strategies to help manage emerging risks, knowing that thanks to quantitative easing, markets since the financial crisis have been unusual.
“If investors’ scepticism is a wake-up call for asset managers, their awareness of a changing environment and the need for new investing tools represents an unprecedented opportunity.”