By: Ron Bundy, CEO, Benchmarks North America
It's been a rough year for active management. Long the dominant force in investment management, active management suddenly finds itself an unlikely underdog as investors and policy makers demonstrate an increasingly strong preference for passive investment solutions. So one wouldn't expect to find too many active management proponents from a group of ETF and index CEOs speaking at the industry's biggest conference for exchange traded funds that are, of course, designed as passive investment solutions. And yet, that's exactly what a packed crowd heard at the "Future of ETFs" session during last week’s Inside ETFs conference in Hollywood, FL.
Our panel of CEOs representing some of the largest players in ETFs and index providers included Bob Deutsch of J.P. Morgan Asset Management, Joel Dickson of Vanguard, Nick Good of State Street Global Advisors, Dan Draper of PowerShares by Invesco, Henry Fernandez of MSCI and me, representing FTSE Russell.
Kicking the discussion off with a provocative question about whether passive investing was akin to Marxism, moderator Dave Nadig, CEO of ETF.com, introduced a common theme: active management is certainly not dead but is in fact evolving. The panelists differed on precisely how and why but they generally agreed that the future of active management will incorporate passive products as increasingly investors build and actively manage portfolios constructed wholly or in part with passive products.
Bob disagreed with the oft-repeated claim that active and passive investing were in head-on competition. “It’s not active versus passive," he said, "but rather active and passive and smart beta.” He argued for the ability of a new generation of smart beta ETFs to effectively bridge the gap between active and passive investing, pointing as an example to J.P. Morgan’s blend of active investment skills and heritage within a rules-based index methodology for its family of smart beta ETFs.
"Not all active investing is stock picking," Nick said. He described an emerging form of active investing in which financial advisors and investors use passive index-based investment tools to power actively managed investment portfolios.
Building on this theme, Joel argued that active investors will be a significant driver of ETF assets in the coming years, through increased use of passive products to implement active strategies. Moreover, the growing influence of passive investing has helped to clarify where active managers truly add value. “Indexes help to highlight where human skills differ from general market or factor returns within the investment process,” he said. In other words, so many areas of investing and investment advice have become automated that active investors and advisors need to show exactly how they add value within the process.
Dan Draper pointed to the role of technology as an accelerant in the rise of passive investing as investors now have access to investment products, strategies and tools once considered beyond their reach. Comparing the rapid evolution of ETFs to microchips, he observed, “There is a digital revolution impacting the ETF industry. In the future, we may look more like Silicon Valley than Wall Street.”
As these changes take place, however, education is key. “There aren’t enough credibile sources” of education, Nick said. The panel agreed that ETF and index providers cannot afford to be passive participants in the evolution of investing. It is incumbent on all of us to take an active role in providing information and education to help our clients understand the new investment environment into which we are moving. I thought Henry clearly identified the important role that index providers can play in this process. “We view our role as part of the third party ‘think tank,’” said Henry. “As index providers we must understand the investment process and provide the tools to help investors do a better job.” Well said, Henry.
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Views expressed by Ron Bundy of FTSE Russell, Bob Deutsche of JPMorgan Asset Management, Joel Dixon of Vanguard, Nick Good of State Street Global Advisors, Dan Draper of Invesco PowerShares, Henry Fernandez of MSCI are as of January 23, 2017 and subject to change. These views do not necessarily reflect the opinion of FTSE Russell or the LSE Group.