In a world where almost nothing seems capable of halting the spread of passive investing, active managers are looking for a lifeline.
Their solution: smaller, more focused portfolios.
Institutional investors are raising their allocations to so-called focused strategies — defined as portfolios holding 50 names or fewer — and distributors are increasingly recommending them to clients, according to a study released by Greenwich Associates in conjunction with Fred Alger Management Inc. Plus, for both large- and small-cap funds, they overwhelmingly believe this is the optimal way to deliver performance.
“It’s indisputable that passive has gained momentum in the marketplace,” said Jim Tambone, Alger’s chief distribution officer. “Passive has essentially created a floor for returns. In other words, you must beat passive or you don’t survive.”
Total assets in index-based passive strategies in mutual funds and exchange-traded funds have swelled to $6.8 trillion from $2.7 trillion five years ago, according to Morningstar. Roughly a third of U.S. assets are now invested this way, but the percentage is rising fast as cash increasingly flows out of active funds and into passive vehicles. That growth has become a looming shadow over active managers, who are pressured to beat benchmarks and cut costs.