Wealth Manager - the site for professional investment managers

Register to get unlimited access to Citywire’s fund manager database. Registration is free and only takes a minute.

PassiveBeat: Amazon’s advice for active fund managers

PassiveBeat: Amazon’s advice for active fund managers
Amazon and the rise of passive investing are two case studies in disrupting the business establishment.

Does the former, which has after all caused far more creative destruction so far, have any lessons for those engaged in the latter?

The latest letter to Amazon shareholders from its founder and chief executive officer Jeff Bezos (pictured), published on 12 April, addresses several issues relevant to tracker and exchange traded funds.

One of his pieces of advice for businesses has a clear application in asset management: ‘embrace external trends’, the most powerful of which in investment is that towards low-cost and passive funds. ‘If you fight [external trends], you’re probably fighting the future,’ Bezos argued. ‘Embrace them and you have a tailwind.’

In 2015 and 2016 a net $1.2 trillion (£950 billion) was allocated to passive, index-tracking funds globally while active funds suffered a net outflow of more than $300 billion (£237 billion) over the same period.

‘These big trends are not that hard to spot (they get talked and written about a lot), but they can be strangely hard for large organisations to embrace,’ Bezos commented.

Indeed, plenty of major fund groups have only lately and reluctantly begun to offer passive funds, and few have overhauled their active fund management teams, with BlackRock a recent exception.

To recover lost ground, several traditionally active fund managers are concentrating their passive efforts on one particular trend highlighted by Bezos. ‘We’re in the middle of an obvious one right now: machine learning and artificial intelligence,’ he noted.

‘Over the past decades computers have broadly automated tasks that programmers could describe with clear rules and algorithms. Modern machine-learning techniques now allow us to do the same for tasks where describing the precise rules is much harder.’

In the investment world, many entering the passive space have duly focused on ‘smart beta’, using investment data to construct alternative indices of stocks exhibiting different levels of size, value and volatility. Legg Mason has for instance acquired QS Investors and Columbia Threadneedle has bought Emerging Global Advisors to drive their businesses in this direction.

Embracing the trend in this way could however conflict with another Bezos maxim: ‘resist proxies’. Here, rushing to launch passive funds – especially smart beta – could be a mistaken proxy for the real trend towards low-cost products. Work by Bloomberg has shown that the bulk of the money flowing into ETFs during the first quarter of this year went to those with the lowest fees; the same is true for all investment products over the past year.

Similarly, FactSet, the financial data company, found that in ETF categories where investors had a basic, ‘vanilla’ choice, money flows in March to smart beta or strategic funds were a net $2.5 billion lower than they should have been had allocations to that sector been proportionate to funds’ sizes.

‘As companies get larger and more complex, there’s a tendency to manage to proxies,’ Bezos observed. ‘You stop looking at outcomes and just make sure you’re doing the process right.’

In this case, that would be the process of launching ever more funds. Yet 2016 was also a record year for ETF closures, and 2017 may well bring an even higher number, implying that the industry is launching unwanted products.

Correcting this should involve a final recommendation from Bezos: ensure your company is obsessed with its customers.

‘There are many ways to centre a business,’ he recognised. ‘You can be competitor focused, you can be product focused, you can be technology focused, you can be business model focused, and there are more. But in my view, obsessive customer focus is by far the most protective.’

Numerous investment firms can point to product innovation and technology as core strengths. Far fewer can convincingly insist that they are customer friendly.

Embracing the external trend of the shift to passive and low-cost investing, while also resisting the temptation to measure success by product launches, should help asset managers maintain their customer focus.

PassiveBeat brings together Citywire’s coverage of all things to do with ETFs, Smart Beta and passives in general. For feedback, comments and contributions, please tweet and follow us @passivebeat or drop us an email at passivebeat@citywire.co.uk

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.
Citywire TV
Play Wealth Manager Retreat 2017: size isn't everything

Wealth Manager Retreat 2017: size isn't everything

We asked our delegates at the Wealth Manager Retreat what they think about the recent wave of consolidation in the industry.

1 Comment Play CIO Tapes - part 3: 'passive funds are anti-capitalist'

CIO Tapes - part 3: 'passive funds are anti-capitalist'

Citywire recently gathered three of the UK's leading fund investment heads to discuss their hopes, fears and the issues that their jobs throw at them daily.

Play CIO Tapes: do investors have it as good as it gets?

CIO Tapes: do investors have it as good as it gets?

Citywire gathered three of the UK's leading fund investment heads to discuss what they fear and what makes them cheer about the year ahead

Read More
Your Business: Cover Star Club

Profile: Rathbone's Newcastle boss on the road to £1bn

Profile: Rathbone's Newcastle boss on the road to £1bn

Starting from zero assets on day one, Rathbone's Newcastle team now looks after just over £400 million in clients money

Wealth Manager on Twitter