Willis Towers Watson calls for a shift from passive to active management

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Willis Towers Watson advises clients to move from passive asset management to active asset management, amid growing concern about the risks of passive equity investing.

The investment consultant, one of the most influential custodians in the pension fund industry, advises around $ 2.6 billion in assets.

The move comes as a report from UBS suggests the meteoric rise in passive investing is slowing.

Luba Nikulina, global head of manager research at Willis Towers Watson, said the company had raised concerns about the risks of concentration in passive stocks for about three years.

This article was previously published by Ignites Europe, a title owned by the FT group.

The consultant is “discussing it now” with all clients who have the governance capacity and resources to choose active rather than passive management, Nikulina said.

The negative implications of climate change for passive investment and more favorable conditions for active investment are also arguments for this change, she said.

“I think this is important because it signals the reversal of the long-term trend towards the passive,” Nikulina said. “In terms of new feeds, we definitely recommend this change. “

Nikulina said that in the US market, where there has been the biggest influx, passive investing is “very concentrated” in the small number of companies to which investors are exposed.

The six largest companies in the S&P 500, including Apple, Microsoft, Amazon, Facebook, Google and Tesla, account for nearly a quarter of the index and the bulk of returns, she said.

“It’s a good race but the more it gets, the more it decreases the probability that it will continue, and there is a risk in the concentration of the biggest names.”

Nikulina added that tech companies made up around 40 percent of the index and asked if investors were getting the diversification they really wanted.

She added that passive investing meant that investors had missed out on companies that increasingly chose to remain private rather than public, and where in the knowledge sector there was “more than growth and more success ”.

She said passive indices were also quite exposed to companies in the old economy, which had carbon intensity issues.

The increase in market volatility since the Covid-19 epidemic, as well as forecasts of “more pronounced” volatility once the government stimulus measures are removed, create new opportunities for active management, a- she declared.

Nikulina added that the trend affected passive stocks more than passive bonds, as the latter still have an important role to play for the purpose of matching pension liabilities.

The prediction that flows will shift from passive to active stocks comes as recent UBS research shows passive funds have failed to gain market share among European equity funds for the first time in ten years last year.

The Swiss bank expects passive penetration to slow in 2021 and beyond. According to UBS, active European equity managers also enjoyed the highest alpha generation in two decades last year.

“While we don’t expect passive penetration to stop in the coming years, the strong alpha generation in 2020, the growing popularity of ESG funds, and high levels of volatility are expected to slow passive penetration in the years to come, ”UBS said.

Paul Doyle, director of Bfinance, an investment consultant, agreed that conditions seemed more favorable to active investing than they had been for some time.

The long-term dynamics of investments moving to Asia and other emerging markets, as well as environmental, social and governance concerns, and carbon references in particular, play on the strengths of active management and generation. alpha, he said.

In an index, there are a lot of mining and oil stocks, which “may not play what you want as an ESG-conscious investor,” Doyle said.

The more recent dynamics of the pandemic and the government’s stimulus measures will mean many winners and losers, he added. “When the markets turn bearish, there is no real hiding place in passive mandates.”

Jo Holden, UK investment manager at Mercer, said there were some headwinds that suggested there could be a reverse flow from liability to asset, but that it would be a “huge move”.

“The stance we take is passive in its place,” Holden said, but added, “We strongly believe in high conviction active management, and the investment themes that will unfold over the next two years bring us to think that there could be quite a large dispersion of returns between countries.

She added that the pandemic is expected to lead to many defaults and said this scenario will create opportunities for active managers.

However, some are less convinced of a possible slowdown in the relentless march of liabilities.

Amin Rajan, chief executive of Create Research, said the industry has been expecting a reverse flow from liability to asset since 2005 and that has not happened.

“Liabilities have their weaknesses, but these are more than offset by the strong tailwinds they benefit as central banks continue to influence asset prices. This is unlikely to change in 2021, ”he said.

“Liabilities will continue their upward march, while assets will attract new assets to take advantage of volatility. It is impossible to predict the evolution of their relative shares: both will have their place in investors’ portfolios.

* Ignites Europe is a news service published by FT Specialist for professionals working in the asset management industry. It covers everything from new product launches to regulations and industry trends. Trials and subscriptions are available at igniteseurope.com.

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