A trio of global fund managers, Baillie Gifford, MFS, and Orbis, overseeing approximately $1.5 trillion in assets, are hosting a joint forum in Sydney, Melbourne, and Auckland. The ‘Active Advantage’ forum aims to highlight the benefits of active management at a time when benchmark-driven investing is increasingly prevalent. Baillie Gifford is an investment management firm. MFS Investment Management is a global investment manager providing investment solutions to clients.
For the past decade, active stock pickers have struggled against the rise of low-cost index investing, particularly in Australia, where the ‘Your Future, Your Super’ regime has led to performance testing and risk aversion. Many superannuation funds are now heavily benchmarked, prompting concerns about unintended consequences for the market and superannuation members. Active managers are losing mandates and hedge funds are finding it harder to trade.
Active managers argue that strict adherence to benchmarks hinders their ability to capitalise on opportunities and create value. They say that some asset classes are ignored because they aren’t relevant to benchmarks. Concerns are also growing that benchmark-driven investing is distorting the Australian sharemarket, dulling proper valuation of its constituents due to passive capital flows focused on benchmark-influencing stocks.
Traders suggest that super funds are starving the market of contra-liquidity. Declining turnover velocity and shorter average holding periods of Australian stocks point to reduced activity. While a UBS study suggests that strong performance of index-dominant stocks may reflect a ‘winner-takes-all’ phenomenon, some worry about the demise of traditional active fund management and the potential for a less engaged shareholder base, which could erode broad market returns. Ideas to change the performance test to tolerate longer periods of underperformance are surfacing.
