Whither active management?
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Charles Jackson is an investor and author with 25 years’ experience in the investment industry. For 13 of these, he was at Mercury Asset Management where he was a member of the Group Board and a Vice Chairman of the Main Board. He was educated at the universities of Oxford and Stanford. 1 Arundel Gardens, London W11 2LN, UK Tel: ⫹44 (0)20 7792 1433; Fax: ⫹44 (0)20 7727 7608; e-mail: [email protected]
Abstract This paper examines the link that exists within the investment industry between the skill with which an investment product is actively managed and investor demand for the product. It also examines the link that exists between fees charged and value added through active management. It presents evidence that these two links are closely related to each other. It also presents evidence that the success achieved in creating value for their investors by the products in a sector of the investment industry is directly related to the strength of these links in that sector. Finally, it proposes a method whereby, through strengthening these links, the investment industry can deliver skilful active management more effectively to its investors. Keywords: investment industry, active management, investment skill, investor product demand, asymmetric performance fees, independent active return, alpha
Introduction The main problem facing the global investment management industry today is the difficulty it has in adding value to investors’ portfolios through active management. Research such as Malkiel (1999) on the US and Quigley (2000) on the UK shows that average performance against benchmark is negative after expenses and suggests that active managers appear collectively to destroy value for the investors who employ them rather than to create it. All commentators agree that things must change. Their prescriptions depend on whether they believe that the problem is insurmountable, or whether they believe that it can be solved. The former make one recommendation, to index, while the latter recommend a
䉷 Henry Stewart Publications 1479-179X (2005)
wide variety of changes in the behaviour of investors, investment professionals, investment firms and other industry participants. Helped by their focused approach, the indexers are winning the argument and the assets. The approach adopted by this paper is to start by setting out the form an investment management industry needs to take in order to deliver positive value from active management to all investors. Next, it compares this hypothetical form with the forms that have evolved for traditional products and hedge funds and makes the case for believing that the problem can be solved. The comparison leads directly to a simple strategy for investors that will help them to find skill, improve their ability to make use of it and
Vol. 5, 5, 293–304
Journal of Asset Management
293
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increase its availability. The paper concludes with a discussion of the two key practical issues associated with implementing this strategy.
Theran investment industry Suppose that in some oth
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