The lure of cheap, uncomplicated passive products has persuaded hordes of investors to turn away from active management since the global financial crisis.
As fee pressures intensify, consolidation among active managers is rising as they scramble to broaden their appeal and remain competitive.
Baird said with quantitative easing winding down, those pressures should ease, but he doesn’t believe the passive genie will return to the proverbial bottle.
“Since 2008 and 2009, alpha has moved around and rotated within the active management segment from firm to firm and sector to sector.
“So, the withdrawal of QE is probably a good thing for active managers because it increased correlation, making it very hard for stockpickers and alpha generators to perform.”
If active managers were able to generate the kinds of returns of the halcyon days before the global financial crisis, Baird thinks some of the pressure from passives would be alleviated.
But he thinks the days of super-normal returns are over thanks to globalisation.
“If we ever were to get back to a stage of much higher returns, that would take the pressure off active managers somewhat because passives would lose some of their competitive edge. Their whole argument is ‘we can outperform active managers’.
“But I suspect it is unlikely that we’ll get the combination of circumstances that culminated in that super-normal growth before the financial crisis.
“There is an awful lot of volume around in the market, liquidity is still an issue and interest rates remain very low.
“It could be that the passives industry has achieved some kind of momentum and will continue to grow anyway. I wouldn’t bet against passives growing, would you?”
