Five Ways Active Managers Can Overcome Passive Resistance

The “flight to passive” continues, with passively managed funds gaining $695 billion in inflows in 2018, versus $85 billion in net outflows from actively managed funds, according to Morningstar. Spurred by the inability of most active fund managers to consistently beat their benchmarks, the ongoing exodus is making it difficult for all but the most successful active managers to deliver alpha and attract new assets.

Rather than encouraging innovative thinking and thoughtful risk-taking, this trend is turning many active managers into “benchmark huggers” who try to minimize tracking error and deliver the beta-like results they believe will keep them in the upper performance deciles of their fund categories.

But sophisticated high-net worth and institutional investors don’t want to pay extra for timidity. They can leverage economies of scale to purchase inexpensive beta in the form of ETFs and index funds. If they’re going to pay more for active management, they expect these funds to outperform their benchmarks over the long haul.

And, contrary to what many in the industry believe, these investors won’t necessarily abandon active funds at the first sign of trouble. If they have faith in its investment philosophy and management team, they’ll be willing to weather periods of short-term underperformance if the overall long-term track record outperforms the benchmark and attribution of both positive and negative results is clearly communicated.

Active managers who want to boost inflows need to understand why the future for benchmark huggers is bleak and consider adopting five key strategies that may boost their chances of gaining traction among these discerning investors.