ESG, Private Credit Are Part of Active Managers’ Survival Plans

(Bloomberg Markets) -- Active is dead. Long live active. Sure, assets in U.S. index-based equity mutual funds and exchange-traded funds now top those in active funds. But stockpickers aren’t heading for retirement. Here they share their survival strategies.

“Clients are looking for areas where they believe information advantages are more likely to exist.”

Robert Higginbotham
Head of Global Distribution T. Rowe Price Group Inc.

Small-cap stocks, international equities and fixed income, and target-date funds are all areas where clients believe active managers offer more insight, according to Higginbotham. “The long-term truth of asset management remains that clients will pay for proven, durable investment skill,” he says.

“An active manager should be thinking long term.”

Dan Ivascyn 
Group Chief Investment Officer Pacific Investment Management Co.

Active managers should be focused on capital preservation, realizing there could be up to three years of frustration vs. passive alternatives, Ivascyn says. “Pimco was in that situation in ’05, ’06, ’07 with people questioning, ‘Has the firm lost its edge? Has active management lost its edge?’ Then, of course, we finally saw the dislocations that differentiated a lot of the active strategies to not only outperform, but to outperform significantly,” he says.

“At present and from an equity market perspective, developing markets, international and global markets, will likely provide greater alpha generation than those in developed markets.”

Martin “Marty” Flanagan
Chief Executive Officer Invesco Ltd.

In terms of fixed income, Invesco believes managers with proven track records can still generate excess returns with multisector products in today’s market, according to Flanagan. Invesco is also “constructive on real estate, private credit, and real assets as it relates to private markets in the current environment,” he says.

“If you want to beat the indexes, you can’t look like the indexes.”

Paul Wick
Manager, Columbia Seligman Communications and Information Fund

Wick suggests looking beyond obvious stock picks. His mutual fund, the best-performing in the U.S. in 2019, owes its success to investments in under-the-radar tech firms. Wick says he has also found “outsized” returns from companies that get acquired. The mid-cap area tends to have “faster-growing” and “less-efficiently valued’’ companies with insufficient analyst coverage, he says. 

“We’re getting a real sense of … the importance of ESG.”

Keith Skeoch
CEO, Standard Life Aberdeen

Managing the climate transition will be one of the most important things for asset managers, says Skeoch. “And if you’re going to do that, you’re going to need an active allocator of capital. Active funds are going to again have their day,” he says. 

“Investment strategies perform better when managers invest significant assets alongside their clients.” 

Dana Emery 
President and CEO Dodge & Cox

Several years ago, Dodge & Cox took a look at academic literature on the characteristics of successful active managers. A few points, including the one above, stuck out, according to Emery. The first important thing her firm noted, she says, was the need to focus “on long-term total return, rather than trying to time the market. High active share is critical; active managers should invest with conviction.” Low fees and low expense ratios also “play a critical role” in helping investors achieve total returns, net of fees, across a full market cycle, Emery says. “Finding managers that display these attributes will not guarantee good results, but they will significantly raise your batting average.”

To contact the editor responsible for this story: Siobhan Wagner at swagner33@bloomberg.net

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