As investors start to shift assets towards passive investments, there are new opportunities for active fund managers as their roles evolve into three distinct branches, says the author of «The Future of Investment Management».

The three branches of investment management that are shaping up are: indexing, smart beta, and pure alpha, said author Ronald N. Khan. «Each of these three branches is going to offer two styles of products - return-focused and sustainability,» said Khan, who was speaking at the 72nd CFA Institute Annual Conference in London held from 12 to 15 May 2019. 

«What we do today and particularly what we do today in the details, is completely different from what we did 20 years ago,» said Khan, who was quoted by CFA Institute Singapore in an article. In particular, environmental, social, and governance (ESG) investing, which sits under the trend of «investing beyond returns», have generated an enormous amount of interest in Europe and increasing interest in the U.S. and Asia, he observes. 

Seven Key Trends

His book: «The Future of Investment Management» was inspired by the changes that have transformed the finance industry over the last several decades. After surveying the investment landscape, the managing director and global head of Systematic Equity Research at BlackRock came up with seven key trends that would shape the investment management landscape. These include:

  • Active to passive
  •  Increased competition among active managers
  •  Changing market environments
  • Big data
  • Smart beta
  • Investing beyond returns
  • Fee Compression 

Two Impactful Trends Emphasized

Out of seven key trends, Khan emphasized two in particular - big data and smart beta - as being impactful. The good news for active managers lies in big data. While definitions of big data vary, Khan notes that such data tend to be higher in volume and higher in frequency and reveals digital traces of human behavior.

Big data, which takes a variety of forms such as text, search data, social media, images, and video, can provide investors with insight into alpha-generating market inefficiencies or potentially leading indicators that get them ahead of consumer sentiment. «This explosion of available data, along with the analytical development of machine learning, is the greatest new opportunity for active management in many years,» Khan said.

Smart Beta

Smart beta strategies are transparent and rules-based efforts to outperform the market. Small-cap, momentum, value, growth are all factors that were previously a form of active investing but that have now been a systematized and effectively indexed. 

«None of these are new ideas...we’ve taken successful components of active management and are selling them cheaply,» said Khan. On average, the factors explain 35 percent of active returns.

Pure Alpha The Future Playground

There is room for active management in the pure alpha space, as investors start to get returns from indexing and smart beta strategies.

«Investors need all the returns they can get ....pure alpha can only be gotten from active managers. This has to be a key focus for active management going forward,» observes Khan.