Small active management players are at risk of being squeezed out of the market by the rise of passives, overbearing regulations and a lack of access to platforms, which is blocking out new entrants.
This is according to Geneva-based boutique Quaero Capital’s CEO Jean Keller, who says the biggest fund houses’ large asset base means they account for a substantial part in the analysis of active management, despite having lower returns and many passive proxies among their large ranges of funds.
‘There has been a lot of closet indexing and in Europe, those that have a strong retail client base have given active management a bad name as a result of easy distribution.’
The utility, cheap price and speed of passives is comparable to fast food chains, Keller says. Active management is the more expensive but better quality restaurants.
That said, large asset managers with closet trackers give clients a distaste for the product and deter them from the higher prices of active management.
This has created a self-feeding process for passives pushing stocks higher and higher, which is pivotal in the case of a small equity universe such as the Swiss market.
‘The Swiss equity market is a very narrow market with less than 270 stocks quoted, so suddenly everyone wants to go passive and it creates a self-feeding frenzy.
‘People think it is great because they are outperforming with passives but the problem is that it's artificial until the day people leave equities.’
Barriers to entry
Going back to basics, Keller says the regulatory framework is causing substantial barriers of entry for new players, creating a lack of challenge for the incumbents and players to keep prices low and quality high.
‘It's becoming so regulated that it's starting to be counterproductive in terms of market access.
‘Today, when you enter a fund-selection process, there are so many non-performance hurdles to meet that it's much harder to be a new entrant.
‘There are still a lot of great managers and successful buyers but it's not a level playing field at the moment and regulation has meant that it's a lot harder to come in and to build a boutique.’
A modern day George Soros would not gain access to the market, Keller says, as he would be turned away based on his short track record and small assets under management alone.
Although regulation is crucial to the industry as a whole, it is also the side-effects of regulation that are creating barriers to entry.
In the past, investors were much more eclectic in the way they bought funds, however, today the general outposts for fund selection are narrowing, Keller says.
‘As a result, the pipes have become fewer and bigger and because the platforms are concerned about costs and have regulations to meet, they are only interested in presenting to large players.’
Keller expects these pipes to widen eventually, however, he is concerned about the survival of small players in the meantime. In the long run, so long as equal market access is achieved, there should be two ends to the asset management spectrum, he says.
‘In 10 years’ time there will be large groups with utility-like offerings with the ability to deliver over the long term. At the other end of the scale you will have boutiques with highly concentrated actively managed products. But the question is: how do we get there?'
Regulation gone rogue
Although regulation itself is the cause of some barriers to entry, the bulk comes from criteria inspired from these rules that goes far beyond, created by large fund houses and platforms, Keller says.
‘Regulators generally understand the problem when you speak to them but with large banks in Europe, there's a leverage effect so everyone wants to avoid problems at all costs and they add so many more hurdles.’
Examples of this include the minimum requirements placed on the assets under management of a fund before investing or the prerequisite that a fund must be registered in 10-12 countries in Europe.
This has caused a disincentive to be creative, Keller says, as fund buyers are ushered towards safe brands as opposed to quality products.