2016, for example, was a “very difficult year for active equity managers. Passives performed better than active managers overall,” admits Libano. While index trackers have been steadily eating away market share from actively managed equity funds, active managers on aggregate continued to see net inflows. This was because, even though their share of the pie shrunk, the total pie kept on growing at a faster pace during the period.
It, indeed, was: it changed in 2016, when actively managed equity funds saw net outflows of close to €70bn, according to Morningstar data. European equity funds were hardest hit with net outflows of €58.4bn, while US equity funds suffered net redemptions of €15.1bn. Active EM equity funds, however, continued to see net inflows.
Beta or alpha?
IM Gestão de Ativos now has about 30% of its externally managed assets in passives, and the rest in active funds. “Last year we had a larger allocation to passives because we wanted a larger exposure to market beta, but now we are back to 30-70,” says Libano. “I prefer active managers personally, but it indeed makes sense to have a larger exposure to passives when markets are beta-driven,” he adds.
Some exposure to passives also makes sense in core asset classes such as European equities and bonds, for diversification purposes.
”In European equities, for example, we have three active managers complemented with passive exposure,” he says.
"It’s extremely hard to find good active managers in US high yield. You can really only find them in the first two deciles"
Though it is becoming increasingly hard to find good active managers in certain asset classes, Libano remains convinced it is worth the effort. “If you want consistent risk-adjusted returns, you should still use active managers. I firmly believe that good active managers continue to have the ability to provide better risk-adjusted returns on the long term.”
Since index trackers have only been commonplace for a limited number of years and we haven’t been through a sustained market correction since most ETFs arrived on the scene, the jury is still out. But what is obvious, is that active managers are better equipped at fending off passive rivals in some asset classes than in others.
“In US equities for example, it is difficult to find active managers who consistently beat their benchmark, but in UK equities there are a lot of manager who do,” says Libano.
Over the past three years, UK equity funds have on average indeed generated much better risk-adjusted returns, which is probably due to the make-up of the index, with its sharp division between UK-focused companies and companies whose earnings are mainly in foreign currency. The large exposure of the index to energy and commodity stocks probably also plays its part in explaining why active managers thrive here.
Passives are not yet quite as common in fixed income as they are in the equity space. But over the past few years, record-low bond yields in Europe have forced investors to reconsider their options.