Cheap passive funds are putting the pressure on active managers © AP

Market turmoil has hit asset managers hard. Since the February 19 peak, some share prices have fallen 40 per cent or more. One consolation for active funds was that tough conditions should allow them to shine. Yet even that silver lining is in doubt. 

Schroders is one of those active managers arguing that the shortcomings of passive trading will come into sharper focus. The 216-year-old company showed its resilience on Thursday when it reported only a modest 6 per cent decline in its assets under management, boosted by net inflows from a Scottish Widows mandate. 

But investment returns over the quarter, down 12 per cent, are pretty much in line with the relevant indices. So far, at least, active investment has not convincingly triumphed. In the market rout, active managers did well by avoiding the worst-hit areas such as energy and banks. But that advantage has faded as markets lurch up.

In the first quarter, US active funds posted their biggest underperformance relative to passive funds since the first quarter of 2016, according to Copley Fund Research. The outperformance of China and tech giants Microsoft, Apple, and Amazon proved costly to many. 

BlackRock — which on Thursday reported a $14bn inflow into iShares in the first quarter — has been one of the biggest winners from the shift to passive investment. Its exchange-trade funds have so far confounded the doubters. Even though some fixed income funds traded out of sync with their underlying assets in volatile markets, they were resilient overall. Its share price has been one of the sector’s better performers. It is down 22 per cent from the peak, compared to the S&P 500’s 18 per cent.

Asset managers will inevitably suffer from a downturn, as fees are pegged to assets under management. BlackRock is partly insulated by consultancy and subscription fees; Schroders by private equity, strategy work and wealth management. Schroders’ strong balance sheet — with surplus capital equivalent to around three years’ worth of dividends — is also a source of strength.

The coronavirus crisis is still at an early stage. Active managers may yet earn their keep. After the global financial crisis, they posted their biggest outperformance against indices in 2009. With cheap passive funds putting pressure on active managers’ margins, a period of convincing outperformance is sorely needed. 

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