The evolution of active management

10 May 2017 | Portfolio construction


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Commentary by Tom Rampulla, former head of Vanguard UK and current managing director for Vanguard Financial Advisor Services in the United States.

Tom RampullaActive management has suffered because of high ongoing costs and poor performance – abysmal performance, to be blunt. Money is leaving the active industry at an incredible rate. The pace is not slowing down; it's accelerating. And it's getting harder for active managers to outperform.

So active management is dead or dying, right?

No, not so fast. But we at Vanguard do think it's evolving. And, in fact, it absolutely must evolve in order to survive.

We know what the old traditional active looks like. But what should the new evolved active look like? Well, first of all, consider low-cost traditional active. Despite the fact that it's really, really difficult to outperform the market, it can be done. There are good managers out there. But they've got to cut their prices a lot. They've got to reduce expenses just to have a chance to outperform.

We work with some great external managers at Vanguard. They're smart people, and they do have an advantage. They work hard to keep expenses low. So of the value that they add on a gross basis, a lot more flows through to the investor.

Another form of evolved active management that we see is actively managed passive portfolios. In other words, professional investment managers expressing their views on the market with portfolios of exchange-traded funds (ETFs), instead of individual securities or regular active mutual funds. It's inexpensive; it's highly efficient; it's transparent. They trade very easily and liquidly.

It's hard to get good data on just how much this phenomenon is growing. But we see a lot of growth and interest from the people who own those portfolios as well as investment advisers looking for a more efficient way to manage their portfolios.

The final evolution that we see on active is factor-based investing. It's investing in risk factors such as value, momentum and volatility. Factors are often called the DNA of an investment. And they're at the heart of the smart beta or strategic beta strategies that we talk about so much.

To paraphrase Mark Twain, we think the reports of active management's death have been greatly exaggerated. Is active dead? No. But we think traditional active is unlikely to survive unless it evolves into something worthwhile for investors.

So what does that mean for advisers? What do we do with all this information? I think it's about awareness.

First of all, be aware of cost. If I haven't already made that point, costs are important. Be aware of what you're paying. If you're going to use active funds – traditional active funds – demand low costs from your active managers. Your clients deserve it.

This evolution we're seeing, and hope to continue to see, is a big idea. It's really exciting for the industry. It reminds me of Vanguard founder Jack Bogle in 1976. Back then, indexing was a big idea. It took a long time to come to fruition. But it's going to enable us to better serve our investors, and I think it's a movement we can get behind. And, finally, it's about awareness of how these strategies work. Do the research, be open-minded, but be sceptical. Remember, there are no shortcuts to investing.

I got into this business because I wanted to be part of the exciting world of active management. And my reasons for staying in this business changed over time. I adapted and evolved. Let's make sure that we adapt and evolve so we can better serve our clients.

Important information:

This article is directed at professional investors and should not be distributed to, or relied upon by, retail investors. This article is designed for use by, and is directed only at, persons resident in the UK.

This article was produced by The Vanguard Group, Inc. It is for educational purposes only and is not a recommendation or solicitation to buy or sell investments.

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

Any projections should be regarded as hypothetical in nature and do not reflect or guarantee future results.

The opinions expressed in this article are those of the individual author and may not be representative of The Vanguard Group, Inc.

Issued by Vanguard Asset Management, Ltd, which is authorised and regulated in the UK by the Financial Conduct Authority.



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