Active challenges: How do managers get selected?

Active managers have more to deliver than ever before. As passive products and fee pressures rise, the asset management industry is up against an even more challenging landscape where making the wrong moves can cost dearly. But what are the right moves? We spoke to Anders Bertramsen, Head of Manager Selection and Director at Nordea Asset Management, to find out how these challenges are addressed.

Can you tell us about the biggest challenges you’re facing in your role as Head of Manager Selection?

There’s some overarching trends in the asset management industry, which makes it more difficult to find attractive actively managed strategies, such as

• Continued increase in use of passive products by market participants, which are causing some active asset managers to struggle financially
• Continued M&A actively among asset managers, which tends to create organizational uncertainty and potential team departures
• Continued fee pressures, which are in some cases causing a disproportionate focus on management fees by market participants

As passive products and fee pressures rise, how can active managers distinguish themselves and add value to clients?

That is the million dollar question. Those two trends – passive investments and fee pressures – are interlinked. If there were no passives, I don’t think that the fee pressure would exist to the same extent. However, they are very real and are continuing to stick around.

Outperforming is a great way to start differentiating active managers, but in recent years, especially on the equity side, that has proven more difficult. There are also times when it’s tougher for active managers to outperform, for example when we have a performance concentration in the mega caps. Whereas when mid and small caps outperform, active managers outperform because they have a tendency to overweigh those issuers.

On the fixed income side, you generally see more active managers outperforming but you also see that the ETFs don’t necessarily mimic the full benchmarks that well. So there’s a little bit more leeway on the fixed income side than the equity side.

Some have used ESG as a parameter to differentiate, which I think is a fair way of doing it. However, it’s becoming more fragmented with everything that is going on in the US, but nonetheless, it’s still a way of differentiating a product.

The asset and wealth management industry has structural growth because people get richer and the world grows in GDP. It’s a nice tailwind, but the passive products and fee pressures are definitely headwinds for most active managers.

What do you think you’re doing that distinguishes your team from others?

That’s a big question. I’d like to think that we’re good at what we do, and I guess most others would think the same of themselves.

We tend to emphasise the team – the people who are managing strategies, especially where they have been around for a long time and where the manager’s approach to capacity management has paid off. Size has an influence on your ability to generate alpha, and historically, there is a sweet spot, depending on the asset class and strategy. There’s no magic number, but prudent capacity management should improve your odds of picking a manager who, over time, will outperform.

Some selectors are very focused on brand recognition of a manager but that doesn’t necessarily correlate with the ability to outperform.

What skills do you look for in managers today that you may not have in the past?

Adaptability: we are not looking for managers to fundamentally change their way of investing or their investment philosophy, but managers who refuse to change anything at all in their processes, will eventually face difficulties. Managers who are open for continuous improvements or adaptations to their approach could have a continuous edge.

You shouldn’t be a follower because that usually indicates that you’re late to the party. At the same time, if you just stick to your guns as time goes by, you’re basically a decaying business. Your Kodak moment is gone.

A manager’s performance in a year is not necessarily an indication of their long-term ability. How do you recognise that long-term ability?

The world is getting more short-term focussed, and when evaluating a manager, the longer time horizon you have, the better. This way you can find out whether you’re actually looking at a manager who is skilful, not lucky.

Clients chase performance, so when managers start outperforming, they start getting inflows. Managers who underperform get outflows. It’s a natural, conscious decision from clients that it’s easier to buy something that works here and now, so we are very conscious of strategy – whether it’s supposed to work or whether we don’t expect it to work. If the performance is as we anticipate, that’s great. But if it’s not as we foresee it, then that’s a big problem either way; bigger, if we expect outperformance but get underperformance, with respect to investors and stakeholders.

What are you most looking forward to at IMpower FundForum?

I want to be inspired by interesting speakers and to meet as many new asset managers (in real life instead of via LinkedIn) as possible to build an even bigger network.

Join Anders Bertramsen and 1,500+ of the most senior leaders in asset & wealth management at IMpower FundForum >>