Below trend growth to continue
Active asset management still offers value despite the rise of low-fee passive strategies in the fixed-income sector.
This was the view of fund managers at the KangaNews-NAB Fixed-Income Beyond the Institutional Sector Summit 2018.
The latest context is the launch of fee-free exchange-traded funds (ETFs) by a major US asset manager less than 24 hours before the summit kicked off last week. Australian fixed-income managers argue that end investors are right to demand appropriate fees but they should also be conscious of the value active management adds.
There’s a role for low-cost passive strategies and higher-cost active solutions, says Christopher Joye, co-chief investment officer, fixed income at Smarter Money Investments. His firm offers a hybrid-security ETF among its fund products with a relatively low – 15 per cent – performance fee as well as a base fee, the totality of which is dearer than index funds.
“Hybrids are very complex and you need expertise to understand them, value them accurately and to know when to buy and sell,” Joye comments. “Our view is that there is a relationship between cost and quality, and if you pay peanuts, you often get monkeys.”
More emphasis on performance fees may be the way forward, Richard Brandweiner, Pendal Group’s chief executive agrees. He cites the example of Japan’s largest pension fund, which pays its active investors a minimal management fee but shares alpha generated by the managers.
Active management allows end investors access to products, strategies and sectors of the market that mainstream ETFs can’t reliably deliver. There is relatively limited liquidity in most Australian fixed-income product, which significantly limits passive funds’ ability to take advantage of investment opportunities.
Chris Black, managing director at Alexander Funds Management (Alexander), doubts the ability of an ETF to replicate the Australian bond market. “There are questions around the extent to which an ETF can or should be active in new issues, but it can also be very hard to get secondary access in Australia. The secondary market provides definite opportunities for us as an active manager.”
The value of active management is only amplified when it comes to some of Australia’s newer fixed-income investment opportunities. Black’s firm is also involved in private debt – a sector he expects to grow as banks continue to step back from direct lending as a consequence of post-financial-crisis regulation.
Alexander recently secured a double-digit return from a private debt investment in what the firm believes to be an investment-grade-quality company. Although Alexander is restricted to 20 per cent investment in illiquid securities, even this allocation allows it to take advantage of opportunities that simply couldn’t be accessed by passive management, Black argues.
“The most recent private debt transaction we completed was a unique opportunity, but it’s amazing how many unique opportunities exist when you’re prepared to do the work to lend to companies seeking debt,” he adds.
Active management is also a more natural channel for genuine stewardship, which incorporates oversight of governance, business strategy and environmental, social and governance (ESG)-focused investment. Brandweiner acknowledges the value of passive management as a portfolio component, but says a hands-on approach is critical if end investors want to emphasise stewardship.
“We’re stewards of capital so we can be – and need to be – mindful of who we invest it with,” he explains. “We can look at the governance and management decisions of companies, vote our shares appropriately and look out for our customers’ outcomes. We’re keenly aware of a focus on stewardship and we think there’ll continue to be a valuable role for it.”
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