A current theme in the investment industry is that passive management will take over everything and active management is doomed. This is certainly not the case. There is alternative, unstructured data that is much better suited to active management today, for example, and there are new technologies like blockchain and trade automation that make the process of executing an investment idea much more efficient. There is today, and there certainly will be in the future, a place for both passive management and active management.
Active Managers Need to Justify Their Costs
The market volatility we've been seeing highlights the continued relevance of active investing. A sustained bull market makes it harder for the active manager to differentiate as passive performance rises and becomes more predictable. Active management tends to do better in periods of volatility as the human touch can seek out and capitalize on more obscure alpha opportunities. That said, whether the market calms down or remains volatile, there is still a trend towards lower fees. While there's always going to be a segment of the market that's willing to pay a premium for premium service, any manager who charges more than the minimum amount charged by a robo-advisor needs to justify that cost.
Active managers have an incentive to bring their own costs down and bring their fees down. One way to do that is to introduce a passive fund or an ETF. Another way to do it is to make the process of active investing, the active portfolio lifecycle, more efficient and integrated. Every time a portfolio manager needs to calculate a risk model, export that spreadsheet into their siloed OMS, and then manually click buttons in that OMS to get the order into the EMS, they’re losing time in getting their idea to market. The industry needs to focus on bringing greater efficiencies and integration to the portfolio lifecycle—in terms of process, cost, and integration with the ecosystem—to help active manager clients.
There are challenges, but there are opportunities to innovate and differentiate by making the investment process more efficient.
The Future of Systems, Processes, and Workflows
When we all go home for the day and go back to being private individuals and consumers, we've come to expect a higher standard of integration. I expect Amazon to know what I was shopping for on my mobile device when I log into my PC or if I talk to an Alexa.
Integration across different applications and different interfaces has created a similar expectation among business users. What I expect to see as a business user is an increasingly interconnected ecosystem and experiences that will be delivered by more than one vendor, but which will all operate in harmony. This trend is not unique to financial services. It spans multiple disciplines. As the world moves from a siloed workstation mentality to an open workflow mentality, I expect my desktop to be smart enough to recognize my role and function within the investment process, and to know the pieces of information that are most relevant to me in terms of my workflow.
On the trading desk, traders often handle multiple asset classes, and segment themselves into high touch and low touch. A high-touch trader working on illiquid securities must pick up the phone to put a deal together. This can be a high yield bond trader, but they might also be taking on a difficult FX trade or even an illiquid equity. A low-touch trader is behaving much more like a programmer, writing intelligent rules and working with AI capabilities to come to the best possible outcome so that when they intervene, they’re intervening by exception.
The discipline is evolving around the technology, and the components themselves need to plug into an ecosystem to make sense of it all. Trading platforms can’t add this interconnectivity and openness after the fact; rather, they need to build around this open ecosystem from the ground up in order to plug into the client's portfolio and trade lifecycle as seamlessly as possible.