Charles Darwin once said ‘It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change’.
This is more relevant than ever today for active managers, who are combating the continued strong headwinds of passive funds, the resultant margin pressures and an increasing regulatory burden focussed on delivering value for money for investors.
Put together, these are creating pressures on product, distribution and marketing strategies. Asset managers that are unable to adapt sufficiently may not survive - we all know what happened to Kodak. So, how should active managers adapt to these headwinds?
According to Morningstar, long-term index funds posted inflows of EUR 307.6 billion in 2024 versus the EUR 150.5 billion cashed in by actively managed funds*. Passive funds now form the core of many investors’ portfolios, with many active managers struggling to clearly set out their ‘value proposition’.
With research suggesting that no more than 15% of active managers will beat their passive counterparts over the long-term, it is now vital that each product has a clear ‘value proposition’ to help set and manage client expectations and to help justify its active fee level.
Active managers must therefore improve in how they set out their ‘value proposition’ vs passive funds. We all know that performance will be a key comparator but, with many active managers struggling to beat the index, what else could a client ‘value’ that would make an active exposure compelling for the price:
- Differentiated returns: does your product offer diversification benefits vs the index? If so, how?
- Concentrated portfolios: high-conviction products that generate alpha will always be popular, but how do you position the strategy? How could it complement a passive exposure?
- Volatility management: are you capturing most of the market upside whilst providing protection on the downside? Furthermore, is this part of the product objective or just a by-product of stock selection? What is your upside / downside capture ratio and do you have targets for this?
- Income – does your product target or generate a high level of income?
The above is not an exhaustive list but, if a product’s ‘value proposition’ is set correctly and equally as important, is delivered, then I believe the other two headwinds mentioned above become easier to combat by default.
This is due to the fact that if a product delivers in line with clearly set client expectations – the ‘value proposition’ – it also helps to justify the fee level charged. It will surely also help with any Assessment of Value (AoV) reporting.
So, considering all this, where should asset managers start?
I would suggest first looking at all fund prospectuses and investment objectives. These are normally written using very broad and somewhat vague terminology to satisfy legal departments, and to provide flexibility at a portfolio management level.
How could these be improved to better set client expectations, better define the investment objectives of a product and deliver a clear ‘value proposition’ for each product?
Oh, and marketing’s life would then get easier too….
*Morningstar Direct Asset Flows Commentary: Europe - January 2025
