ACTIVE vs PASSIVE: Return of the active heroes

Investors disillusioned by the poor performance of active management began to favour passive strategies. But in the Nordics alpha-hunters may be en vogue once again. Angele Spiteri Paris reports

The crisis saw Nordic investors flock to passive management after they found they were paying relatively high fees for what were essentially beta returns. But now, as markets have picked up and investor sentiment is on the rise, active management is back on the menu.

Peter van Berlekom, head of Swedish and Nordic equities at Nordea investment Management, says: “There is more of a focus on value-added and products that look for active alpha. More importantly, investors are ready to pay accordingly.” He says that in Sweden, the institutional market has historically focused on lowering costs, hence the attention given to passive management.

Investors, however, still had a portion of their portfolio dedicated to alpha strategies and they turned their back on active management following disappointing returns. And no-one could really blame them.

Albin Rosengren, partner and head of sales at East Capital, says: “The wave of passive allocations seen early in 2009 was, in our view, a decision made by investors who wanted to benefit from the rebound in the markets as quickly as possible and consequently did not have time to engage in long search processes for active managers, but rather took a beta exposure in the short term.”

Lars Kallholm, head of Nordic markets at UBS Global Asset Management, says: “Many investors reviewed their asset management arrangements and were surprised that they were paying for a service they thought was skill-based but was actually offering them beta exposure.”

According to an article in the Swedish economic journal Dagens Industri, during the period 2004-2008, only 27 out of 270 actively managed funds actually beat their index – that is one in ten.

“These figures are quite shocking,” says Madeleine Senior, head of Northern Trust’s Nordic asset servicing client service team.

Steen Jorgensen, head of Nordic institutions at Alliance Bernstein, says: “Institutional investors were disappointed by returns on some alternative investments that were supposed to be uncorrelated when they actually were not.”

In spite of this, he adds: “There is definitely a switch back into active management; it is coming back slowly.”

Rosengren of East Capital says: “Investors are reviewing their strategic allocations and are looking to find active managers who can top the market returns through active strategies, especially in areas where active management has a higher success rate such as emerging markets.”

And there are signs in the market to support this claim.

Last year Keva, the €20bn Finnish local government pension scheme, switched an estimated €1bn of its emerging market equities from a passive strategy to an active one.

Furthermore, a survey by Pyramis Global Advisors, a subsidiary of Fidelity Investments, found that 77% of Nordic pension funds believe actively managed equity strategies will deliver alpha in the foreseeable future.

Kjell Norling, head of global fund distribution at SEB, says: “If you want alpha or active risk in your portfolio, now is the time to invest.”

And it seems that alpha beta separation, which is something several Nordic institutions carried out a few years ago, is being talked about again and this might work in favour of active managers.

Alpha beta separation
Alpha beta separation was all the rage in the Nordics and post-crisis it seems to be a focus once more.

Research found that assets invested to produce alpha are likely to involve highly significant beta risk and comparably minor alpha risk. Therefore separating the alpha and beta portfolios allows investors to be more aware of the risk they’re taking and also to create a better performing alpha portfolio.

Senior, at Northern Trust, says: “Alpha beta separation makes the decision of what strategies to invest in passively and where to go for active management a much simpler process.”

According to Kallholm of UBS: “Most institutional investors are happy to manage the beta/market exposure themselves, or as cheaply as possible with an external product or provider. They then look for return uncorrelated to that beta exposure from active managers.”

He says: “Investors are willing to pay more for specialisation and skill. The ability to generate alpha should be paid top dollar, as long as you can prove that you have the skills you are being paid for.”

Jorgensen of Alliance Bernstein says: “In spite of the huge fee pressure, investors are willing to pay for active management.”

But as the figures from Dagens Industri show, investors looking to go down the active route again had better do their homework.

Northern Trust’s Senior says: “Rather than looking at active management versus passive management, investors should be looking at value – where are you getting the best value versus the cost you’re paying?”

Norling at SEB notes that alpha exposure may not always be the right thing to have in certain markets. “There are some markets where it pays you to only have beta exposure.”

According to Jorgensen, in the wake of the crisis investors have not only reviewed their active mandates but have also revisited their passive arrangements.

Senior agrees: “There have been permutations in the passive industry. Some pension funds that used to manage their passive exposure in-house are now looking to outsource.”

She points out, however, that because of the M&A activity in the fund market, some pension funds have also gone the other way. A few have begun to manage their passive portfolio in-house because of organisational changes within their original passive manager.

Test the market
Investor preferences when having to choose between active and passive management depends largely on the market situation.

Norling of SEB says: “In boom markets, active management delivers alpha.” Although this involves stock-picking skills, it is generally easier to pick winning stocks when the market is on the way up.

Norling continues: “In depressed markets, following the beta in the market [through a passive strategy] is the right decision, since it’s difficult to exclude bad stocks in that environment.”

In fact, passive instruments like exchange-traded funds (ETFs) saw their subscription rates soar throughout the crisis and this wave of interest is bound to hit the Nordics soon.

©2010 funds europe



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