While the lion’s share of risk budgets lie with active domestic managers, outperforming managers pursuing global equities, high-yield or hedge fund strategies may not be being given enough risk. Rogers says: “If Australian equities managers don’t do well, it undermines these balanced funds. So let’s index some of the Australian equities portfolio and separate out where else to take risk and pay for active management in the portfolio.” This could mean buying active exposures elsewhere or pumping more money into other asset classes for beta reasons. “It’s too expensive to play every asset class in active, so we need to start optimising how we play.”
Super funds can accommodate and profit from complex strategies, but at which point does the search for further active talent become impractical? “Finding the seventh-best Australian equity manager – how does this ultimately benefit members? The incremental benefit for the investor in a balanced fund for finding the next best new manager is a handful of basis points as opposed to product innovation or further sources of diversification in the portfolio,” Rogers says. He expects that new alpha sources sought by funds will be largely funded by Australian equities portfolios, diminishing the long-run home country bias.
“Half-active, half-passive is not a statement of diminished confidence in the active management definition of delivering good risk-adjusted returns, but is rather a statement about wanting to take those opportunities where they can best be taken, and not to be loaded up on Australian equities,” he says. Believing that markets are inefficient, ipac is searching for managers that can exploit them, “but we want to play it more cleverly and in a more diversified way”, Rogers says. Therefore, at ipac and other institutions, “Australian equities will be the incremental source of funding for new stuff,” Rogers predicts.
“We’d like to portray it as a constant value-add, but in reality, competition and the nature of the economic environment determine how big the opportunity for active management ever really is,” says Rogers. BEAR MARKET BATTLELINES The crisis has done little to alter the long-held battlelines fronted by proponents of active and passive investing. Many active managers, analysts and consultants say that it’s not a good time to be indexing; beta sellers say that, in the end, the market always outperforms stock-pickers.
For those funds taking big bets with passive management, Fiona Trafford-Walker, Frontier Investment Consulting’s managing director, says the cost benefits of a beta-tracking exposure should be weighed against the prospects for active management in today’s volatile market. “If active managers were ever going to make you money, now is the time they will be doing it,” she says. Rogers and many others agree. “In the last five years, so many people were trying to eke out that active return, and killed off the opportunities.
