The Problem in Fund Management

Active fund management, with some notable exceptions, has largely failed to outperform passive management net of fees, which is particularly the case, since the 2008 Crash. The impact of this has been substantial flows from ‘active’ managers into passive alternatives.  Less well realised is that the passive alternatives pose significant risk issues that have yet to be tested in a severe market downturn. Their growth arguably represents a major mis-allocation of resources. AMps  provides an intuitively attractive solution to the problems of both current active and passive management within the IAM Advisory investment process.

It can be demonstrated that the opportunity for adding to returns through proper ‘active’ investment is substantial. A few managers, who are consistently performing well and are clearly thinking ‘outside the box’ have successfully captured this active opportunity. There is academic works that  suggests that the difference between possible active investment outcomes and the actual results remains has increased, particularly when compared, net of fees, to passive management where charges have been reduced to extremely low levels.

We contend that the cause of this mismatch, between potential active returns and actual outcomes, is the fund management industry’s almost universal obsession with market indices at every level of the investment process. Typically a static composite index benchmark allocation is used for initial portfolio construction and in setting a risk profile.  The portfolio is then managed around this benchmark for both strategic and tactical decisions and, finally, the portfolio performance is measured against the same standard.  Managers consider one risk as being the distance from the market benchmark. In such an environment it is unsurprising that the potential for active management is not being fully accessed. It is illogical and counter-intuitive that we should attempt to drive an ‘active and dynamic’ investment strategy by referral to, and comparison with, a passive static standard and then complain about the result.

What is less appreciated is that passive strategies also represent substantial and unappreciated risks and costs.

AMps provides a direct solution to the problems in the way current active strategies are managed and to the explicit and implicit risks of passive strategies. This significantly increases the potential for extra returns and provides a more dynamic way to control risk.