The low-growth environment has led schemes to take starkly opposing views over whether active fund managers can deliver value, the third instalment of Intelligent Thinking has revealed
The most ardent supporters of active management claimed the current challenging conditions were the ideal time for skilful fund managers to show their worth.
Chairman of trustees, £45m scheme: “With top-quality fund managers, active is still beneficial, providing you understand and agree the mandate that is being followed.”
Non-executive director, £4bn scheme: “Active has not justified its cost. It is a marketing myth.”
Trustee, £500m scheme: “Active will always have a part to play, despite the attractions of passive management.”
Pensions manager, £330m scheme: “Active management is not preferable in any environment.”
Investment director, £4.2bn scheme: “We intend paying more attention to smart beta rather than market-cap weighted passive investment, but we have always had the overwhelming majority of our investments run on an active basis.”
But other survey respondents argued active products rarely justified their higher costs compared with passive funds.
Consultants who also took part in the survey suggested that whatever investment strategy schemes favoured it was important they were able to effectively select and monitor their managers.
“It is a choice for trustee boards to take depending on their resources and preferences,” said John Belgrove, principal at Aon Hewitt.
“Active managers need actively managing by investors. Those that choose passive should think carefully about the choice of benchmark they track.”
The debate over the merits of active versus passive management has become especially prevalent over the past few years as interest rates and economic growth rates have been sluggish.
Schemes that are able to achieve a higher and less volatile return on their investments – while maintaining value for money – will be in a better position to provide their members with an adequate retirement income.
Pros of active management
Several schemes that took part in the survey said they were willing to pay a premium for active managers who were able to produce higher returns in the current low-growth environment.
We interview our active fund managers at least once a year and more regularly if returns are below market expectations
“Active management is preferable, but needs to be reviewed regularly,” said a member-nominated trustee at a £500m scheme.
“We interview our active fund managers at least once a year, and more regularly if returns are below market expectations.”
Another MNT, responsible for £4bn of assets, said active management was imperative when dealing with less-developed markets.
Consultants who took part in the survey said some areas were better suited to active management, such as emerging markets and the IT sector. This was because skilful managers were able to flourish in them.
But when it came to investing in other sectors – such as areas of the property market – passive funds were often better value.
This was due to the sectors either being heavily researched or having such high correlations of price movements between stocks. This meant active management was less valuable.
Phil Edwards, principal at Mercer, said that as well as offering a potential return for schemes, stock-picking could also be used as a tool to reduce risk.
“Many of our clients have introduced more defensive mandates within their equity portfolio, focusing on less volatile parts of the market,” he said.
“Such strategies performed particularly strongly during 2011, protecting capital when the wider equity market was in turmoil.”
Cons of active management
But a number of other respondents claimed the fees involved in active management did not necessarily lead to better performance, with one MNT at a £4.2bn scheme suggesting active management was just a “marketing myth”.
Active management is only preferred if it is not closet index-tracking, otherwise passive is more efficient on cost grounds
A more tempered view came from the pension fund manager at a £1.4bn scheme, who said: “Active management is only preferred if it is not closet index-tracking – ie must have a high tracking error – otherwise passive is more efficient on cost grounds.”
With constraints on funding, pension schemes are increasingly looking to trim costs and active management fees is one area coming under scrutiny.
Over the past five years, UK schemes have moved from being 68% invested in actively managed funds to 59%, according to research by the Investment Management Association.
The Intelligent Thinking survey results will be back in September, with an inspection into whether schemes and their consultants have changed their attitudes to return-seeking and liability-matching assets.