The slow death of managed funds seems inevitable with the arrival of multiple new investment vehicles, but one may do well to remember Mark Twain’s famous quote: “Reports of my death are greatly exaggerated”.
In many ways, the last few years in funds management have been a reflection of the new era we are living in with technological advancements spearheading initiatives that disrupt market traditions. It doesn’t matter what business we are in today – from groceries to journalism – digital delivery threatens margins, market share and blue-chip industries.
The funds management industry is no exception but it certainly is quirky about the way it goes about addressing the obvious changes afoot. Most portfolio managers are capable of illustrating the downstream effects of artificial intelligence and the ramifications of Amazon on Woolies or Coles but can’t see the wood from the trees when it comes to disruption within their own industry.
Disruption is coming from new vehicles, such as managed ETFs, ETPs, managed accounts, and also established ones that are going through a resurgence, such as passive ETFs, LICs and LITs. The main casualty, it would seem, in the minds of some strategists is managed funds, which are being hounded into decline.
The issue isn’t so much about whether managed funds are good, bad, dated or redundant. It’s about the new vehicles extending new benefits that seem more in tune with market needs and importantly, reaching new markets more quickly.
In recent times, we have witnessed the ETF market’s massive global growth – at a rate that has surpassed the index fund movement’s inroads against active managed unit trusts. So, it’s not just active versus passive. It’s about liquidity, transparency and pricing that grabs the headlines – more of a sort-of instant gratification than the laborious process of buy/sell spreads and unit trust registries that take days to get underway.
Tomorrow’s investors don’t see that as acceptable, which is a point worth considering for all new product launches. Time is not a friend. Now we see LICs, managed ETFs and SMAs moving into the space.
The silly thing is that liquidity is a marketing tool rather than a need. Intra-day trading and same-day pricing and redemption is a very important feel-good factor but hardly relevant in the life of a five-10-year investment program promoted by savvy advisers and wanted by astute investors. Yet it sells itself and it implies the unit trust is a dated, non-transparent, yesterday offering.
Moving into the platform world the same disruption is happening but with greater clarity on old versus new … and managed fund promoters sit right in the middle of the debate with their livelihoods at stake.
The news isn’t so difficult to grasp, though. About 30 years ago master trusts arrived on the scene; 15 years later wraps arrived, 15 years after that (today) managed accounts have arrived. Master trusts are dead barring appalling advice to remain with them. And wraps are legacy offerings that wouldn’t be started today. Managed accounts, however, are the disruptors and here to stay for at least another15 years if the cycle is anything to go by.
For fund managers, managed accounts should be the holy grail but education is needed and the market isn’t doing this well with all the participants jockeying for headlines.
The good news should be evident, though. Managed accounts enable managed funds, LICs, ETFs and SMAs to all be promoted so it’s just the question of whats best for the client. This is the really interesting bit that may see the resilience of the Managed fund industry.
Thinking about education, the issue is not as binary as SMA versus managed funds. It’s more about the investment management process, the manager’s style and whether it can be accommodated in an SMA or whether it’s better in a unit trust.
Some management styles and alpha-add strategies cannot sit within an SMA. Some managers that use derivatives for capital protection or ease of market access, will also struggle in an SMA.
This tells us the two should, and will, co- exist and jointly reside on a managed account platform. The decision as to which will be used is the style and benefits of the manager.
That is a great outcome for all and a win-win for common sense and intelligent advisers who want diversification of managerial style. It’s actually the end of the wrap cycle, not the managed fund – whose death has, indeed, been greatly exaggerated.
*Ian Knox is the managing director of Paragem. The views expressed are his own. This column welcomes contributions. Contact: iknox@paragem.com.au