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Financial advisers find market conditions favour active managers

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In today's market environment, characterised by low interest rates and low return expectations, a majority of financial advisers believe that now is the right time to increase their allocation to active investment strategies.

That’s according to a survey of more than 200 financial advisers conducted by AllianceBernstein (AB) at the 2015 Annual Schwab IMPACT Conference in Boston from 10-13 November, 2015.
 
While 72 per cent of advisers reported that they currently use ETFs in client portfolios, nearly seven in 10 (68 per cent) state that market conditions favor an active approach to asset management.  In particular, as concerns about the safety of high-yield ETFs continue to escalate, advisers are increasingly looking elsewhere to exposure to this asset class.  Nearly two-thirds (65 per cent) of advisers either do not use high-yield ETFs or plan to decrease their exposure to these funds in the next year.
 
"More and more financial advisers are recognising that if you're looking for long-term exposure to high yield, passive ETFs are a bad investment," says Gershon Distenfeld (pictured), Director of High Yield at AB. "The math speaks for itself: over the first nine months of the year, the two largest ETFs have sharply underperformed the average active manager, not to mention their own benchmarks. Being tied to an index means ETFs can't pick and choose their exposures to sectors or securities the way active managers can, and in less liquid asset classes like high yield, the average long-term investor really gets hurt going passive."
 
Financial advisers are also finding that liquidity risk can be easily misunderstood and mismanaged.  According to AB's latest survey results, nearly one-third (30 per cent) of financial advisers feel they do not have a strong understanding of the liquidity issues impacting the fixed income market. 
 
Those who do understand the risks of liquidity indicate that it is the most significant cause of concern preventing greater adoption of high-yield ETFs in their portfolios.  Thirty-two per cent of respondents cited liquidity issues as their biggest concern for investing in high-yield ETFs, followed by underperformance relative to actively managed fixed income funds (22 per cent), complexity of the asset class (12 per cent), hidden fees (4 per cent) and another 30 per cent cited a varying range of other challenges and issues.
 
"While the lack of liquidity in the market is clearly a risk, it can also provide an opportunity for additional returns to active managers that are able to stay out of crowed trades and keep cash on hand," says Ashish Shah, Head of Credit at AB. "Every financial advisor should be asking money managers what they are doing differently in this low liquidity environment – and the answer is clearly 'nothing' if you are using a passive strategy."

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