Active investors: rise of the machines
The automation revolution was supposed to come for Lincolnshire fruit pickers, not Mayfair stock pickers. Yet this week saw further evidence of the accelerating shake-out in the active fund management sector, driven by the march of the machines. Merian Global Investors fell gratefully into the arms of Jupiter, in a £419m deal that creates the UK’s second largest manager of retail funds. The deal is a defensive play for both companies, which have suffered large outflows to computer-driven funds that offer customers lower fees.
Active retail fund management – or stock-picking by humans – looks like it’s fast becoming the Kodak film of its generation. Its nemesis, computer-driven passive investment funds that typically track the wider market, are outperforming their human equivalents and rendering them obsolete. Regulatory fines, the shuttering of popular property funds and the spectacular implosion of cult fund managers like Neil Woodford, are all making active management look like an anachronism.
Response? Jupiter’s boss, Andrew Formica acknowledged the existential threat to the sector without offering much in the way of hope beyond scale economies. “We are proud of being a high conviction active manager” he told the FT, adding that: “too many people think that active is a dirty word — but it’s really not.”
Impact? In markets anaesthetised by vast central bank liquidity, capital allocation has admittedly become indiscriminate, stifling the natural volatility on which active management depends. But the question for the dwindling band of active managers, is whether they are nonetheless facing inevitable extinction, or whether the trust and confidence draining from the sector can be restored.
Obsessing about nomenclature looks like a red herring. It’s not obvious that the ‘active’ label is a negative, and in some respects the greater surprise is that an investment approach described as ‘passive’ has been such a runaway success.
One solution might be to embrace the active principle, and ape the hedge funds and activists who are more assertive in pushing for value. The values and practice in the sector are also ripe for examination. Opaque charging structures, high salaries and the sense of entitlement conveyed by some industry egos suggest an industry that has lost sight of its consumer. Luke Ellis, chief executive of London-based Man Group, echoed the same sentiment about the hedge fund industry, when he told the Financial Times recently that the star-trader culture, once synonymous with the sector, had been damaging.
The Jupiter deal won’t be the last consolidation play in a sector now desperate for scale economies. The same rot is setting in at Invesco, where it also emerged this week that investors have withdrawn £200 million from funds run by Neil Woodford protégé Mark Barnett. As the sector faces down the remorseless rise of the robots, the solution might lie in becoming more human, not less, and better aligning the interests of the sector with its customers.