The tolerance for large active managers producing index-like returns is over, says UK firm RWC Partners – and current outflows to passive products are “not coming back”.
RWC Partners chief executive Dan Mannix spoke to InvestorDaily about the structural changes under way in funds management, which have seen US$500 billion ($620 billion) flow from active to passive products in the past year.
Asked about the shift to passive strategies in recent years, Mr Mannix differentiated between smaller, benchmark-unconstrained shops like RWC Partners and large, listed active managers.
“The large managers are underinvesting in their investment capabilities because they're focused on margins, not quality,” he said.
The broader problem for the active funds management sector, he said, is that most players are simply managing too much money.
“You have to manage the capacity of your products closely, because at the nth degree of running too much money you can't perform. You just end up as an index fund,” Mr Mannix said.
“I think the tolerance of people overcharging for low tracking error has reached a tipping point and it's not coming back.”
However, competition among smaller active managers that carefully monitor their capacity is likely to improve, Mr Mannix said.
“Where there is massive disruption and price competition is for those notionally active managers who've been running very low tracking error, probably very average products,” he said.
RWC Partners currently runs US$11.3 billion for clients, including the Global Horizon Equity fund, which has US$1 billion under management and a ‘soft close’ of US$5 billion.
Mr Mannix is in Australia talking to Australian superannuation clients who, in total, have approximately US$500 million invested in the Global Horizon fund.
RWC is also shopping around an emerging market strategy to Australian and New Zealand institutional investors, which currently has US$2.2 billion in assets under management.
“You find people in emerging markets running $30-40 billion, but that's just too much money in emerging markets. You're missing out on a significant amount of the opportunity,” Mr Mannix said.
“The whole point about emerging markets is you find interesting, less researched, less liquid opportunities.
“But the reality is if you can only get a fraction of a percentage of the portfolio into that idea, then there is no point in doing it.
“So you end up generating returns from the behaviour of the very large companies or big macro elements like currency or country.”