blending insights
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Blending Insights
Joe Parkin
For professional clients / qualified investors only
November 2012
Why “Blending Insights”?
Source: BlackRock, Simfund. Please note, the data excludes AUM in Cayman Islands, British Virgin Islands and Bermuda domiciled funds.
European AUM Split by Active and Passive Funds
2 FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY
82%
84%
86%
88%
90%
92%
94%
96%
98%
100%
2004 2005 2006 2007 2008 2009 2010 2011 Jun-12
% o
f A
UM
% of AUM in Active Funds % of AUM in Index Funds % of AUM in ETFs
We interviewed:
35 Multi-asset, Advisory and Discretionary
institutions across EMEA
Investors with predominantly active, blended or
passive portfolios
Our respondents manage ~ €2.5 Trillion*
5 of the top 10 Global Private Banks**
3
Our approach
*Source: BlackRock, as of Year End 2011
**Source: Scorpio Partnership Private Banking Benchmark 2012
FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY
The Blending Insights
5
Investment philosophy and client base are key
“I’ve been a fund selector for so many years, and
I have to believe that I can
add value through selecting funds.”
“So, we really try to go from an agnostic standpoint,
throw it all in the machine and purely from a
quantitative perspective, as emotion free as
physically possible, to say ‘is it possible for a fund
selector to find value?’”
It's not just a theoretical or academic discussion of what’s best…
FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY
6
Three identities emerge
Actively Active • Currently focused on using active management to generate alpha and not actively
blending
• Indexing, where it is used, is only for cash management or as a last choice if other
alternatives are unavailable.
Embracing Blending • Adopting indexing for tactical or short-term exposures, or
• Moving towards a more comprehensive approach to blending
Agnostic Allocators • Agnostic process for blending and the use of indexing.
• Primary focus on asset allocation to deliver alpha– implementation choice often a
secondary consideration.
FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY
7
There’s no single answer
“I think the fact that we’ve tried to go all the way
down a very technical route and come all the way
back down to what is more a qualitative approach
has been a bit surprising.”
FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY
Asset class efficiency
Some trends: US large cap equities, high yield… But plenty of disagreement
Select by asset class or blend within them?
Is that all you need to consider?
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So what drives blending processes?
“We will make that decision at that particular point in time, and then decide
whether to go active or passive, but it’s a function of time. The decision to
go passive in US, UK small cap today is not going to be the same as the
decision three years down the line.”
FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY
9
Blending often evolves…
“It sounds strange, but there was not a time when we sat together and said:
‘Okay now we’re going to do this’. It more or less evolved.”
FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY
10
Catalysts
Client-Driven
Regulation
Current Investment Markets
Costs
Performance of Active Funds
Growth in Index Product Range
Business Opportunity
What is driving these changes in investment approach?
FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY
11
Catalysts
“There is some expectation in investor communities, in the market,
that passive products should play a role in people’s portfolios.”
Client driven
FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY
12
Catalysts
“The starting position on returns on equity and fixed income does
not do the trick anymore, so you have to do more, you
have to be more diligent…”
Current investment markets
FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY
13
Catalysts
“The regulator has played a very interesting role here.
A few years ago they were more or less telling everybody you should offer
passive over active and I remember the asset managers at that time were
quite astounded that the regulator was taking such a pro-passive approach.”
Regulation
FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY
14
Catalysts
“If we are in a lower return world, then the cost on a relative basis
(active versus indexing) will matter more...”
Cost
FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY
15
Blending isn’t easy
Blending active and index strategies does not come
without challenges and obstacles
Changing a Mind-Set
Having an In-House Manager Advisory Revenue Model
Communication
Selling a Story Availability and Structure of Indexing
Education Operational Challenges of using ETFs
FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY
The Future
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The Future
“One thing is quite clear, that we will see pressure on prices,
on margins, in our business.”
Fee compression
FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY
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The Future
“In the RDR world, active versus passive becomes,
as far as the industry is concerned, a much more level playing field now.”
“The fear is that once you start moving towards an advisory model,
a lot of our advisory clients will say: ‘Well, in that case, either we’ll go
to discretionary or the execution-only option’.”
Advisory business model
FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY
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The Future
“So the small percentage of active managers that have great track
records will get piles of money and the majority of them won’t.”
“We think the likelihood of active managers not delivering again for
the next ten years is lower than it was for the last ten years.”
Future of active management
FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY
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The Future
“You’re starting to see the fragmenting of what we mean
by ‘index’ and therefore what we mean by ‘passive’.”
Evolution of indexing
FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY
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The Future
“We do think that in time, that blended will be the range that we
sell the most of. That combination of value for money, plus the
active overlay, plus the active fund selection, that combination is
the sweet spot of what everyone wants.”
“People have moved slowly into passive. I think they will keep
moving into passive even if active management delivers, then
at some stage the pendulum might swing back.”
Future of blending
FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY
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