Context

Is passive asset management overtaking traditional active strategies? If so, is this trend driving a move towards alternatives? These questions were addressed by three senior asset management executives at the ALFI Rentrée conference. They also discussed how Covid is impacting these trends.

The audience was told that passive funds and ETFs account for 30% of US and 20% of European funds sold, figures that continue to grow. ETFs in particular have done well, with an average 15.5% annual growth over last 10 years in assets under management in Europe which now stands at a total of nearly €1trn. “This sector is currently largely dominated by institutions, and the retail market is set to grow,” noted Isabelle Bourcier, Head of ETFs at BNP Paribas Asset Management.

Trends gain force

According to Robert McKillop of Standard Life Aberdeen: “there’s not really a passive versus active debate because both deliver different outcomes for clients.” He explained this by pointing out that “90% of revenue is available for active managers.” Another key aspect of this, he argued, is that “half of revenue will in the future will go to alternative investments.” 
As for Covid, Mr McKillop believes it has served to amplify pre-existing trends. “Fee pressure is here to stay, not just driving assets to passive, but also between managers in each category, and also driven by consolidation of buyers.” This underlines the need for product and process innovation, he said, arguing that data should be harnessed to develop better targeted portfolios that meet client requirement at a good price.

Part of this is resilience to ensure funds keep their promises. The Covid crisis put pressure on passive strategies as liquidity dried up, but according to Ms Bourcier: “Covid volatility has shown the resilience of ETF products.” This is despite “in March and April the fixed income market became illiquid, leading to a temporary mismatch between indexes and ETF valuations.” Yet despite this turbulence and redemptions during this period “higher levels of subscriptions returned since,” she said.

Trend toward alternatives

The other side of this is “a global trend to alternatives that Luxembourg is harnessing,” said Karim Khairallah, Managing Director and Co-Portfolio Manager with Oaktree. “On the demand side there is a search for yield, on the supply side there is growing sophistication of how to create portfolios across asset groups,” he said. 

For example, in the real estate sector, where some assets had suffered from the Covid crisis, “the likes of student housing, manufacturing, health care bring yield and sufficient liquidity to attract institutional, and increasingly, sophisticated retail investors,” he said. 

With these trends in mind he noted the importance of ensuring ESG considerations are seen to embedded in these investments. Mr Khairallah believes the industry can make the transition. “A lot of it is common sense. To a very large extent we are doing this already, and now we have processes in place to manage and monitor issues and to fix them in the companies we acquire.”

Short term with Covid he says there will be extra challenges given restrictions on face-to-face meetings, and he called on regulators to show understanding of these constraints. On the upside “it is a big opportunity to improve and streamline processes,” he said.