CEOs Make a Case for Active Fund Management at FundForum

At FundForum USA 2013 in Boston, CEOs of asset management firms spoke about changing dynamics in fund management and made a case for actively managed funds.

In the debate between active vs. passive management, fees play a large role in investors’ decisions, and as equity markets have seen large gains over the last years, passively managed funds have seen huge beta returns, making the case for actively managed funds more challenging. Shawn Lytle, CEO in the Americas of UBS Global Asset Management, said that for institutional investors, there has not been much of an institutional market share gain for actively managed funds lately, but there has been a shift away from passive exposure to alternatives.

Panelists noted that since the financial crisis, investors have placed more emphasis on volatility in their choices. As Peter Bain, president and CEO of Old Mutual Asset Management, said, a passive strategy may seem safe, but it only ensures that investors get the same volatility as everyone else does from market swings, rather than “addressing the real underlying concern” of generating more stable returns, which an active strategy can address. Bain also argued that passively managed funds and liquid alternatives have had better marketing campaigns, and actively managed ones need to do a better job communicating their side of the story.

Since interest rates will eventually rise and the equity market gains face challenges from the eventual Fed taper, panelists stressed the importance of generating alpha. But instead of questioning the returns of passive investments, said Bain, investors have been allocating the non-passive portion of their portfolios into liquid alternatives, which are “presented as a magical solution.”

However, investors need to be careful thinking “that there’s a panacea,” said Alan Reid, CEO of Forward. Whether it’s an index fund or an alternative fund, there’s no easy solution, he said.

On the other hand, Lytle said that “penetration rates are low” for liquid alternatives into portfolios from his perspective. While there’s been a lot of talk about liquid alternative, he hasn’t seen a dramatic shift yet. “I do think it’s here to stay and it will grow,” he said regarding liquid alternatives, but there has been more of a move into real estate, private equity and traditional hedge funds.

Panelists also spoke about the trend towards a multi-managed platform. Daniel Kingsbury, CEO and president of Pioneer Investment Management noted that the multi-manager platform “is doing extremely well” in Europe, and he believes that it offers a value proposition that will eventually become more common in the U.S.

“It will be interesting to play out over the next decade whom investors will ultimately trust in doing allocation…and it may not be the managers,” said Bain.

From Lytle’s perspective, he said that UBS has been a co-fiduciary of pension plans, as “there’s been more interest with partnering with consultants or other asset managers to provide advisory services.

The panel also addressed the question of aging populations in many countries and whether that will mean a shift towards fixed income. But Lytle suggested that investors won’t just ask for bonds. “They want outcomes,” he said, as retirees are living longer and need stable returns. And a more actively managed portfolio, he argued, is what is required to see a more specific outcome.