Our article There are too many active managers and subsequent presentations at Towers Watson’s Ideas Exchange conferences around the world in 2014 sparked a lot of consternation in the industry. Some clients and the media seized on this, saying that Towers Watson called for the abolition of active management. Our position is that we should have less active management. Not none, but less. It’s rational for an individual investor to hire an active manager to try and do better than all other investors. Unfortunately this just launches an escalating arms race, and the eventual, assured conclusion is a sub-optimal outcome for the end saver. While the paper tried to exemplify the issues through a thought experiment, our key issues with active management could easily be summed up by:
- Perhaps the number of active managers isn’t the problem, it’s the aggregate cost
- Reducing the cost of active managers could give asset owners significant sums each
year to credit to their beneficiaries’ accounts - Catalysts for reducing active management (or its cost) made come from regulation,
growth of DC pensions, up-skilled asset owners or a new social environment
regarding “what’s fair”.
Clearly this is against the interests of active asset managers in aggregate: could/should the industry still move in this direction given the benefit to the ultimate beneficiaries?