blending insights

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**

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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…


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.


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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.”


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.”


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.”


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?


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Catalysts

“There is some expectation in investor communities, in the market,

that passive products should play a role in people’s portfolios.”

Client driven


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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


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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


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Catalysts

“If we are in a lower return world, then the cost on a relative basis

(active versus indexing) will matter more...”

Cost


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


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


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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


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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


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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


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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


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