Active or Passive? What's Driving Change in Asset Management

There is no shortage of media coverage focused on the impact that passive investment strategies are having on the market (we'll loosely define passive here as index funds, ETFs and smart beta products). Recent articles like BlackRock's Op-Ed in the WSJ plays one side of the debate while active managers play the other. In real terms, 84% of plan sponsor assets were actively managed in 1996, while today that number is at approximately 69% (per this Callan report). I'm often asked how this active/passive power struggle is changing the tech and ops space today. My view is that the "passive pivot" has fundamentally impacted our world with persistent fee pressure and resulting budget stress, engendering the need for automation and scale. This is impacting every manager, everywhere. However, there is little evidence of the passive shift driving technology and operations in a direction that is different from what diverse or active-only managers are working on today. There are exceptions of course, but I believe the majority of passive-related tech and ops change is aligned with the trends of the broader market. The following examples come to mind:

Multiple products on a consolidating set of systems 

Many firms are building out smart-beta products or acquiring asset managers that offer them, if they haven't already. These products bridge the divide between fully active and pure index-driven investments, making their cost effectiveness appealing to both retail and institutional investors. But smart beta investments aren't driving new technology platform decisions on their own. Passive products may have initially been treated separately to support their launch, but it appears that they are now just another product firms want to get onto consolidated, enterprise systems, like their active brethren (ETF administration is admittedly an outlier here). Active managers’ technology and operations groups have been dealing with product expansion for some time (global funds, CITs, alternatives, private equity, and others) so passive expansion is joining a crowded table for consolidation.

Enhancing performance attribution capabilities

Delivering more precise and granular performance attribution analysis has been a focus area for investment managers of all types during this post-recession bull run. Clients are putting a microscope on performance and that equates to a focus on security level attribution (and the data that supports it), however those demands are being shared by both active and passive managers. Passive investments need a detailed level of tracking to ensure they are delivering beta or “beta plus.” That is their primary goal after all, but this is not just a passive push. Active managers are dying to tell the story about the value they are bringing, or on the more protective side, explain specifically why they are underperforming. In the end, attribution is an intensive data exercise and all asset managers are looking into how to best improve their attribution capabilities, whether it be for active or passive products. 

Dealing with the impact of managing significantly more data

Managers are acquiring significantly more index and benchmark data than they did 10 years ago, in addition to buying purpose-built tools to help manage that data. This allows asset managers to make better decisions and support strategies that follow, or are reliant on, indices and benchmarks. The cost? Acquiring and managing that data. Most managers on the street continue to grade themselves as "immature" when it comes to governing data broadly and benchmarks/indices are adding work to the data management organization's pile. This type of data was once the province of the front office but client reporting, sales, and marketing demands for the data are changing how the data is deployed. In short, data requires tight control and is another example of where passive demands align with active.

Is the active vs passive debate worth following for tech and ops professionals? Sure. This macro-struggle is likely to continue in perpetuity with the future of investment management hanging in the balance if you’re to believe the headlines. It’ll be fascinating to see just how much passive investment the market can support and if rising interest rates drive flows back to active management. But in my view, and contrary to the hype, the impact of passive investing has already been "baked in" to buy-side technology, and generally aligns with tech and ops priorities of active managers. Don't be fooled into believing some sea change to investment technology is coming purely because of the passive influx.