Speaking at the Towers Watson Ideas Exchange in Melbourne last week, global head of the Thinking Ahead Group Tim Hodgson conceded that a limited amount of active management can be “incredibly useful for society”.
“Partly it’s about the raw, red-blooded competition that sets prices and makes them efficient,” Mr Hodgson said.
“My problem with these active managers is that it turns out that they are providing closet index tracking but charging an active fee,” he said. “So they are destroying value as far as society is concerned."
Active management is a ‘tragedy of the commons’ activity, he said.
“It is perfectly rational for a single investor to hire an expert to make sure that they don’t own ‘less good’-quality assets,” Mr Hogdson said, “but if word gets out, other investors are going to hire their own people to ensure that they’re not left holding the less-good assets.”
The end result is an escalating ‘arms race’ that leaves exactly the same set of assets in the investable universe, Mr Hodgson said.
“[The same assets] are still owned by the investors, but now we have a big layer of expensive intermediaries to pay, and therefore we should have less alpha-seeking than we do at present.”
Up to 70 per cent of assets could be managed via an index tracker without sacrificing the market efficiency active management provides, he argued.
“Is 70 per cent in passive the right number? I don’t know. It is my educated guess.
“But with 30 per cent of the assets being aggressively competed over, we’re probably close enough to efficient prices,” Mr Hodgson said.
The Thinking Ahead Group recently conducted a survey that included the statement “Too much effort is spent hunting for alpha” – and only 17 per cent of asset managers agreed with it, he said.
Mr Hodgson said he was, however, encouraged that there is a ‘core’ of people in the industry that realise “alpha is a negative-sum game and maybe we’re spending too much effort on it”.
