Anyone who reads or watches media or reviews stats from places like the Investment Company Institute knows that passive management has and still is kicking active managers’ butts. The proliferation of ETFs (I have designed six indexes tracked by ETFs, and actively managed long-only stocks and two hedge funds) and their broad categories provide instant access to most major asset classes, investment strategies and many unique investment themes. Add to this group of ETFs double and triple leveraged versions issued by leaders such as Direxion.
Why? Why isn’t most of our money invested with Ivy League grads with active investment processes that can beat the market? Who wouldn’t want to be active? Why would anyone not want action and a point of view?
Performance and fees are used as excuses by the media. But all managers have periods of underperformance and nobody complains about fees when things are working.
The real answer in a word is marketing. And this is THE area where active managers have taken this migration of assets from active to passive lying down, no pun intended!
They sat on the sidelines and lost control of the conversation in the press, at industry events and in the investment committee meetings of large asset owners such as public funds, family offices, endowments and foundations. This is also the case in research department at major brokerages and large RIAs.
The promise of ETFs, as we have written for our clients, and other passive investment structures is to have no negative alpha (read investment performance below the benchmark) other than fees and tracking error, which outside of commodities, tend to be de minimis. Investors, asset owners and those that advise them ask, “Why risk over or under performance to the market?” Since we live in a post-fact world, and considering few people remember 2008 let alone 2001, all asset owners seem to want today is to ride the market to new highs.
Who cares about:
- Beating it
- Downside protection
- Lower volatility
- Risk adjusted returns
There are many more reasons to allocate to active strategies—if you want the rest of the list, become a client—including the enticement of a unique investment process. But selling the romance of your investment process, or even doing any marketing at all, is said to be “so not us” or “so demeaning,” by many managers.
Marketing works, and is now a necessity to succeed in the investment world. The issue at hand is how to market appropriately for your firm, its style, its current clients and its target prospects. That requires strategy and firms like ours, who have raised assets for ourselves, in addition to assisting numerous managers. We can uncover the optimal strategy, target prospects set and the methodology to acquire new assets.
Own your message. Own the conversation about risk management, superior long-term returns and why institutions, consultants, family offices, and financial advisors should all be flocking to your door.
Seriously, launching only a brand campaign will do little to protect or grow your assets under management. It requires an acquisition plan and full execution to achieve goals.
Managers understand this process and prove it by updating the investment side of the house with technology and comprehensive processes. Investing is the core business. Managers can accomplish the same upgrade and modernization for their marketing. Until managers decide to act, E5A will continue to work for more passive strategies than active, and I can assure you, whoever we work for will own the conversation.