Fortunes of active management industry look set to improve
Changing market conditions could partially reverse recent trend towards passive funds
Passive funds now account for more than 20% of global assets under management, a record high and more than four times what they were almost 15 years ago. Stonehage Fleming, which provides family office services globally for wealthy families, believes this trend could partially reverse as market conditions change and become more favourable to active managers. Active managers have historically performed better on a relative basis when intramarket correlations are lower, dispersion levels are higher and market leadership is not excessively concentrated. The first two points are true because they increase the managers’ opportunity set to generate alpha; if all stocks in their index are highly correlated, it negates the effects of taking active risk against the benchmark. The point about concentration is a function of two things: it cuts the odds of generating alpha as it reduces the opportunity set of outperforming stocks; and it increases price momentum, which drives passive indices an...
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