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ANALYSIS: It is time for active managers to leave benchmarks behind

Benchmarks are a vital part of the asset management sector. Funds are measured against them, bonuses worked out in relation to them and entire sectors of the industry predicated upon them. But, if recent trends are extrapolated outwards, the days of the benchmark in its current form should be numbered.


In the interim Report on its Asset Management Market Study published on Friday, the UK Financial Conduct Authority pointed out that that there is around £109bn in what they termed: “Expensive funds that closely mirror the performance of the market” (they have a tracking error below 1.5) and, which it said, are considerably more expensive than passive funds.

This figure was taken as a further indictment of the asset management sector’s inability to adequately look after clients. It will also be taken as further proof that the so-called ‘passification’ of investment is likely to continue – after all, if so much of the sector’s AuM is failing to beat the benchmarks against which its custodians are measured, why not just move it into vehicles that track those benchmarks at a fraction of the cost?

This is an understandable reaction and one that active managers have countered by shouting about their active share measures from the rooftops. But in a note out on Monday, Bernstein took the point further, positing that the distinction between active and passive itself as it is currently constructed is under threat.

Smart beta assault

In its latest Black Book note, titled The Future of Asset Management, the broker shows that the cost of buying factors is coming down rapidly, as is evidenced by the graph below which shows the pricing of the most popular form of such products – ETF-format, long-only equity, US smart beta funds.