Advisers See a Place for Both Active and Passive Investing

Their No. 1 objective for client portfolios is downside risk protection

Advisers believe that both active and passive investing play a vital role, according to Cerulli. More than 80% believe that passive investments can reduce fees and that active managers are ideal for certain asset classes.

“Approximately 75% of advisers agree that active and passive investments complement each other,” says Brendan Powers, senior analyst at Cerulli. “Cerulli argues that the debate of active or passive has shifted to active and passive, with more focus on how to best use both as tools to build more efficient client portfolios.

“In general, active will retain a key role in asset classes where it adds value over passive,” Powers continues. “The asset classes where more than half of advisers prefer actively managed mutual funds include international/global fixed income (61%), multi-asset class (60%), emerging markets fixed income (58%), emerging markets equity (53%) and international/global equity (51%).”

As to which U.S. equity asset categories advisers plan to boost allocations to, the most common are technology (33%) and small cap (30%). The top portfolio objective that advisers are focused on, cited by 98%, is downside risk protection.

Cerulli also discovered that advisers currently allocate 64% of client assets to actively managed strategies, 25% to passively managed exchange-traded funds (ETFs) and 11% to passively managed index funds. Fifty-five percent of advisers create customized investment portfolios for each client, with 42% starting with investment models that they then alter. Among those advisers using models, 80% use models created by their practice, 68% use home-office models, and 66% use asset manager models.

Advisers plan to use mutual funds less in 2019, with their usage dropping from 32.8% of client assets to 28.2%, with the money going to ETFs and separate accounts, instead.

Among asset managers, 54% say that building out new vehicle offerings is a high priority. This jumps to 60% among large asset managers.

Among asset managers that offer collective investment trusts (CITs), 70% say they provide their company with a large opportunity for growth. Among asset managers that currently do not offer CITs, 14% plan to roll them out in the next 12 months. Eighty-eight percent of asset managers also say that the next generation of target-date funds (TDFs)  in all likelihood will include strategic beta strategies.

Active mutual fund assets totaled $10.7 trillion as of the second quarter of 2017, while index mutual fund assets stood at $2.9 trillion. By 2021, Cerulli project that active mutual fund assets will grow to $13.4 trillion, and index mutual fund assets, to $5.4 trillion.