As the biggest ETF provider in Australia, Vanguard has the right to crow about another knockout performance over active equity. But invective commentary is a red flag, especially when it’s based on something as changeable as recent market performance.
Despite its potential and the massive investment behind it, the Consumer Data Right has had little impact due to a host of factors. Frustrated with its low take-up, the government is making changes to put the framework on “more sustainable footing”.
After a brutal period, active equity managers look to turn a corner
Over the last decade we’ve seen traditional stock pickers become increasingly marginalised.
While some corners of the funds management industry have done comparatively well over periods – private equity, for example, has thrived – it has been a largely challenging time for equities traders.
Not that anyone is pre-disposed to feeling sorry for fund managers. Selling investment nous involves, amongst other things, a sheen of confidence that’s often mistaken for hubris. Sympathy isn’t easily generated.
It might be time for observers to pull back on the schadenfreude, however. In many ways equity managers are at the heart of the investment landscape, and large pockets of the industry depend on the intellectual capital they bring to the table.
But there’s no denying that somewhere along the way, things went awry for stock pickers.
Ten to fifteen years ago the broader equities management sector was hurtling towards $200 trillion in global assets under management, and the domestic active management scene was being lit up by market darlings IFM Investors, Macquarie, Perpetual, Magellan and Platinum. Passive, exchange traded funds (ETFs) were making their presence felt, but the market share was relatively minor.
Today these passive funds remain the little brother to active funds, but a decade-long bull run (broken momentarily by the covid dip) has encouraged investors to pour billions into ETFs. Inflows to passive now trump active in most major markets. According to NMG Consulting, active’s share of the market declined from 79.3 per cent in 2018 to 68.3 per cent in 2023, and is forecast to fall to 62.2 per cent by 2028. Meanwhile, passive grew from 14.9 per cent in 2018 to 25.2 per cent in 2023, with 31.3 per cent forecast for 2028. The prediction makes sense; the more scale ETF providers get, the more attractive they can make their products.
ETF detractors say there are other, more nefarious drivers of flows into passive. The ETF movement is a populist one, it’s been said, built around a simple sales pitch perpetuated by gurus like Scott Pape and large-scale providers like Vanguard and BlackRock. According to the mythology, rather than paying stock pickers (‘who lose 80 per cent of the time‘) and financial advisers (‘who charge one per cent just to outsource everything‘), investors can simply beat the market by buying the market. Both of these statements are flawed, of course, but they appeal to the masses.
The real emerging struggle for active equity managers, however, is selling.
Retail and wholesale distribution through advisers is problematic. Anecdotally, it’s much harder now for BDMs that target these markets to get a meeting with financial advice firms. The prevalence of managed accounts has led to advisers and licensees diverting those meetings to the asset consultants and investment committees that run model portfolios.
When BDMs do get an audience with these new gatekeepers of capital, it becomes less about personal relationships and more about metrics. The asset consultants, keenly aware that their own ongoing viability is dependent on portfolio performance, and that a critical factor in that is the total management expense ratio, are much more bullish on demanding fee discounts.
On investment returns, active equity’s performance has been cast in shadow by the organic growth of global markets during the last decade. Some stock pickers have done well, but many have not. In fairness, one of active management’s drivers is its ability to protect investment portfolios when markets fall, but markets have proven remarkably resilient over the last decade.
In lieu of winning the performance battle against index funds, many active equity managers have been forced to lower fees and further compress margins. Meanwhile, costs have risen. To get onto an approved product list, for example, managers need a rating from a reputable agency, which will generally cost $30,000 per product, per year. A new generation of smaller research houses are charging less, but the rating carries less weight.
Through all this, equity fund managers are also keenly aware that when performance dips and flows start to go backwards, the fall is usually precipitous. Winning back lost trust in the investment market is hard done.
All of this pressure on fund managers is warranted, no doubt. Market forces are a great leveler.
But while some may have gotten a kick out of watching the tall poppies of the investment landscape get cut down a peg or two, it’s worth remembering that there’s a downside to this. Active management provides critical degrees of diversification, and a balance to the ecosystem by acting as a counterpoint to market-tracking indexes.
Active also supports the allocation of large tranches of capital to areas like infrastructure and real assets, that feeds into projects like road building and hospital development. Moreover, active equity managers are heavily relied upon by our nation’s superannuation funds to steward vast tranches of investment capital.
Fortunately, one thing the stock picking cohort has going for it is resilience. The lines between active and passive are blurring, and equities traders are finding creative new ways to ply their trade. Active equity managers have been providing versions of their own passive funds for a while, and are proving popular on the SMA side of managed account product offerings.
There’s less hubris on the equities side of funds management now. The participants that remain are battle-hardened. They exist on tighter margins and ply their trade with less resources than they did a decade ago. Pressure is breeding agility, with the more savvy among them plugging artificial intelligence tools into their systems and processes.
The stock picking cohort is far from dead, but they’ve taken their knocks. Don’t be surprised if they emerged stronger for it.
