Last updated: 11:33 / Monday, 29 February 2016
Cerulli Associates

Active Managers Are More Threatened by the Potential Growth of Strategic Beta Compared to Most Passive Managers

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Active Managers Are More Threatened by the Potential Growth of Strategic Beta Compared to Most Passive Managers
  • While new money may feed strategic beta products, asset managers express concerns that offering strategic beta may cannibalize assets from existing active products
  • On the other hand, passive managers see strategic beta as an opportunity to offer differentiated, higher-fee products, a departure from the highly competitive commoditized passive business
  • Cerulli believes active managers are more threatened by the potential growth of strategic beta compared to most passive managers

The growth of strategic beta assets will continue to strain active managers' ability to retain assets, according to new research “U.S. Evolution of Passive and Strategic Beta Investing 2016: Opportunities for Asset Managers and Indexers” from Cerulli Associates.

"Strategic beta represents the middle ground on the active to passive spectrum-it can be viewed as a hybrid approach," states Jennifer Muzerall, associate director at the firm. "The subjective assumptions made about the investment strategy lend itself more to an active strategy, but its rules-based and transparent implementation exhibits characteristics similar to those of passive."

Growth of strategic beta assets will continue as more investors begin to understand the benefits of implementing strategic beta products into their portfolios, such as the potential to reduce portfolio risk and enhance returns while benefitting from a cost savings compared to active management.

"Over the next decade, strategic beta may influence a new way of thinking about the baseline for passive investing," Muzerall explains. "Strategic beta development raises the bar for active managers and their ability to generate alpha. Active asset managers are begrudgingly moving into strategic beta because they continue to see outflows from active products. While new money may feed strategic beta products, asset managers express concerns that offering strategic beta may cannibalize assets from existing active products."

"On the other hand, passive managers see strategic beta as an opportunity to offer differentiated, higher-fee products, a departure from the highly competitive commoditized passive business," Muzerall continues. This leads to the question, who should be more concerned-active or passive managers? "Cerulli believes active managers are more threatened by the potential growth of strategic beta compared to most passive managers."

 

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