Alpha may become more dominant in low-return environment

Active management could be set to become a lot more important to investors in a low-return environment, one fund manager says.

Thursday, November 3rd 2016, 6:00AM 2 Comments

by Susan Edmunds

Alister van der Maas, managing director of Russell Investment in New Zealand, said there had been a noticeable shift into passive investments over recent years, which started in the early 2000s but had picked up pace again more recently.

But he said with expected returns across all asset classes having dropped, the importance of the value that alpha could add had been heightened.

“If you are expecting a balanced portfolio to return 5% gross, or 3.5% net, and you could get an additional 2% in alpha from active management of the portfolio, that’s quite a lot in a 5% environment. In a 10% environment it’s not so much. The importance of alpha is higher now that it has been.”

A passive investment strategy could only be expected to track an index, minus fees, he said. But a good active manager should return more.

The trick was picking the right one, he said. It could be a labour-intensive exercise.

“It’s hard to pick a good active manger but if you have a process that you can trust, why wouldn’t you?”

But adviser Brent Sheather dismissed the suggestion.

He pointed to comments from Professor Paul Marsh, of the London Business School, who said low returns would make it hard to sustain asset managers’ fees in the near future.

“The headline in the Financial Times the other day was 99% of active US equity funds underperform’,” he said.

Van der Maas agreed there would be pressure on all fees, including fund manager and adviser fees but he said that was not necessarily an issue that would only apply to active funds.

Tags: Active v Passive

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Comments from our readers

On 3 November 2016 at 8:40 am Brent Sheather said:

Here is some context around Mr van der Maas comments. Coincidentally the October edition of the Journal of Finance, page 2333, contained a paper by three finance professors from Oxford University. They looked at the success or otherwise of consultants like Mercer, Russell and Towers Watson in choosing fund managers for institutional investors. Their conclusions were scathing – they found that “investment consultants recommendations of funds are largely driven by soft factors (governance, philosophy, process, etc) rather than the funds past performance. However we find no evidence that these recommendations add value suggesting that the search for winners is fruitless.” The reason people can get away with comments like this is that CPD in NZ is pathetic. How many other financial advisors buy the Journal of Finance I wonder? None is my guess. Far easier and more profitable not to think.

On 4 November 2016 at 9:00 am Michael Chamberlain said:

People claim that a volatile environment means you should be active or a low interest rate environment means that you need to be active. The reality is that the arguments do not change. For someone to add value someone else has to lose and the loser is not the passive investor it is another active investor - this is just the maths. The real issue is the "why". Why are you investing and what are the liabilities you are looking to meet. It is therefore a question as to whether the pattern of returns from active or passive is better relative to the why? For most investors, not all, the answer will be passive, but passive does not put food on the table of the active manager or more correctly transfer wealth from the active investor to the active manager!

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