Active managers are well and truly feeling the force of the disruption taking place in asset management.
Here in the UK, two of our biggest stockpicking firms, Standard Life and Aberdeen, are merging. In the US, Legg Mason yesterday become only the latest active manager to announce it’s shedding jobs. And, of course, we also heard this week that BlackRock is going to be relying less on human input and more on algorithms in an attempt to reverse the dreadful performance of its active funds.
All this, ultimately, is good for consumers. The world’s big asset managers are far too inefficient, and if cost savings are passed on to consumers in the form of lower fees, then all these changes are to be welcomed.
The question for the investor is, Will all this make the case for using active funds any stronger? Only time will tell.
But for those who think there’s an easy way for active managers to regain consumers’ trust, Ben Johnson, Director of Global ETF Research of Morningstar, has the perfect answer: active management will never escape the arithmetic of active management.
Net returns equal gross returns minus the cost of playing the game, and the average passive investor must — yes, must — outperform the average active investor, net of fees.
Whether its done by humans, robots, indexes, or cybernetic organisms active management will never escape the arithmetic of active management pic.twitter.com/bhhByeD0vZ
— Ben Johnson, CFA (@MStarETFUS) March 30, 2017
Related post:
The basic arithmetic the fund industry won’t acknowledge
Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector.
