Opportunities in Active Asset Management
Prof. Dr. Francesco Franzoni, SFI Senior Chair, Università della Svizzera italiana
Zurich (English), October 28, 2019
Given the explosive growth of passive products, active asset management is under pressure to deliver on its promises. This Master class will describe the recent trends in Active Asset Management. What are the strategies that have generated performance? Additionally, cutting-edge academic research that develops tools to identify the most skilled asset managers will be discussed. The main conclusion from this research is that Active Management delivers outperformance. However, to detect the best managers one needs a sophisticated approach.
Context
The boom in passive investment products has been the most notable trend in asset management in the recent decade. In the US, assets in passive funds stood at $5.7tn at the end of 2018, compared to the $7tn parked in active funds. According to a recent report by Moody’s, passive investment funds will overtake active funds by 2021. In Europe, passive investing is growing, but commands a smaller share of the market. Moody’s predicts these low-cost products will represent a quarter of managed assets by 2025.
Passive investment tools are inexpensive, as they cut the fees that are paid out to fund managers, brokers, and research providers. Active managers respond to this competition by lowering their expenses. The average expense ratio of a US equity mutual fund fell to 0.55% in 2018, which is almost half the cost charged by active managers at the turn of the millennium. These competitive pressure implies that only the most efficient active managers will survive.
Final investors, be them retail or institutional, face an important dilemma. Should they ride the trend and switch to cheap passive products, possibly exploiting pre-packaged risk premia through smart beta products? Or, should they renew their trust in active managers, expecting that they will deliver outperformance when volatility returns to financial markets. Arguably, as passive investment grows, more opportunities are left on the table for smart managers. In this sense, the growth in passive management is creating the living space for highly-skilled asset managers.
Then, to solve the dilemma, investors need to ask whether skilled managers exist, and how they can be identified. This Master class intends to provide tools to answer these questions.
Recent academic evidence challenges the popular view that active management does not generate value for investors. This new research convincingly shows that active managers have delivered on their promises. In particular, improved statistical techniques and more data show that the average asset manager has skill and does not underperform after fees.
Of course, mastering these techniques requires a degree of sophistication that is not accessible to all investors. Institutional investors are better poised to deploy the intellectual capital as well as the constant monitoring efforts that are indispensable to select the best active managers. In this Master class, we will study the cutting-edge academic research that can allow institutional investors to identify skill in asset management.
Content of the Master Class
1- The landscape in asset management: U.S., Europe, Switzerland
2- The theory of Active Management: the Efficient Market Hypothesis vs. Efficiently Inefficient Markets
3- Early evidence on Active Managers’ performance
4- New metrics to identify skilled managers: Active Share and Patience
5- New evidence on Active Managers’ outperformance
6- Strategies that deliver alpha (Practitioner’s contribution)
Target Audience
Wealth Management and Advisory, Asset Management, and Investment Banking.
SAQ Recertification
This Master Class is an acknowledged SAQ recertification measure for the CWMA profile and comprises four learning hours.