— Passive investment strategies, which aim to match
market benchmarks like the Standard & Poor’s 500
rather than beating them, have been gaining popularity
to manage, such funds typically charge lower fees, which
explains part of their appeal to investors.
as the trend accelerates, it brings new attention to how
money managers with active strategies at their core,
including Baltimore-based T. Rowe Price Group and Legg
Mason, are responding to an investment strategy that
appears to be here to stay.
money management firm is having to respond to
this," said David Berman, co-founder and CEO of
Berman McAleer, based outside Baltimore. "It’s
real. It’s not a fad. It’s not going away."
T. Rowe Price and Legg Mason are feeling the pinch.
the third quarter, T. Rowe reported growth in earnings
and assets under management, and said 84 percent of its
mutual funds beat Lipper averages for similar funds on a
total return basis for the three-year period ending in
September. Yet investors withdrew a net of $200 million,
largely from the firm’s actively managed stock funds.
Legg Mason reported outflows of $1.5 billion from its
equity funds, for a net outflow of $300 million for its
July-to-September quarter, while also growing earnings
and total assets under management.
managers, who handpick stocks they think will rise, have
struggled to beat the market in recent years. Add in
growing attention to the typically higher fees such
managers charge, and more investors are moving their
money away from active funds to passive alternatives,
with their lower fees and lower risk.
about three-quarters of invested money in the United
States held in actively managed funds, the trend is more
of a thorn in the side of large active managers than a
destructive blow, but nonetheless they can’t ignore
it, experts said.
management will still exist, but you’ll have to do it
better and you’ll have to do it less expensively, and
that’s the pressure T. Rowe and Legg Mason and others
are feeling," Berman added.
Rowe, Legg Mason and dozens of other money management
firms rely on portfolio managers to pick and choose the
best stocks and funds to invest clients’ money in,
with the goal of performing better than benchmark
indexes, such as the S&P 500, which includes the
stocks of 500 large companies.
passive funds aim to mimic the indexes, including in
their portfolios the indexed companies’ stocks. The
goal of these funds is to match the market, not beat it.
experts attribute the rising popularity of passive funds
to a greater awareness among investors of the fees they
are paying for actively managed funds — many of which
aren’t beating the indexes.
think investors are starting to realize they’re paying
all these fees for actively managed funds and there’s
no guarantee they’re going to outperform," said
Mark A. Johnson, an assistant professor of finance at
Loyola University Maryland. "They’re asking
themselves, ‘Why am I paying for something I may or
may not get?’"
popularity of passive investing will put pressure on
active managers to beat the benchmarks, and on
investment firms to be more competitive with their fees,
always had pressure to do well and perform,"
Johnson said. "This is going to put more pressure
way active managers have responded to the trend varies
20 years ago, Fidelity, one of the largest mutual fund
companies in the world, adopted a new strategy to give
passive investing a much larger role in its business,
said Brian Hogan, president of Fidelity’s equity and
high-income division. Today, the Boston-based firm has
about $230 billion in passive assets, or just under 11
percent of its total assets under management.
funds are on the menu for clients of T. Rowe and Legg
Mason but remain a smaller part of business. About 5
percent of the roughly $813 billion in assets under
management at T. Rowe is invested in passive funds, for
example. Legg Mason does not break out its passive
assets from its roughly $716 billion in assets under
management because it is a small amount.
than make passive investing a separate silo within their
business, T. Rowe and Legg Mason recommend clients adopt
diverse portfolios with a mix of active and passive
us it’s diversification, diversification,
diversification," said Legg Mason CEO Joseph
Sullivan. "The more we’re diversified, the more
choice we can provide clients, the more balance we can
Mason’s diversification strategy spans its products,
the fund mix in its portfolios, how people can access
their portfolios and geographically where its
investments and businesses are located.
or active, people are looking for the best value, so T.
Rowe wants to show that investors will make more money,
on average, by choosing its actively managed funds, said
CEO William Stromberg.
over time you deliver better value after fees, then over
time you should be able to keep your customers happy and
ultimately grow business," Stromberg said.
Stromberg and Sullivan said they expect passive
investing to remain an important part of their business,
but think the trend will slow as active managers begin
to beat benchmarks again.
funds have been around for decades but became
fashionable in 2009, as the stock market began to
rebound from the financial crisis, experts said.
banks, such as the Federal Reserve, were all lowering
interest rates and working together to restore stability
to the market, which created an environment in which
stocks were moving together, with little difference
between winners and losers, Fidelity’s Hogan said.
That made it much harder for active managers, who tend
to fare better in periods of volatility, to beat the
market, he said.
market is cyclical and after seven years of generally
rising prices, volatility may be on the horizon —
especially following Donald J. Trump’s upset win of
the presidential election, experts said.
and businesses are unsure how Trump will govern and how
his campaign promises about overhauling tax policy,
restricting immigration and renegotiating international
trade deals will play out.
financial experts expect uncertainty and volatility that
may vary by sector, which could favor those with active
strategies, said Jonathan Murray, managing director of
wealth management for UBS Wealth Management Americas.
can just buy the S&P Index in a passive way and you’ll
have exposure to all of them, but if you have good
research that can show you certain sectors are going to
outperform others, why not overweight those
sectors?" Murray said.
example, banks expecting a boost from tax and regulatory
reform under Trump could fare better than stocks of
hospitals and insurers should Trump to make good on his
campaign promise to repeal the federal Affordable Care
many experts and fund managers believe the pendulum may
soon begin to swing back to active funds, they agree
that the investors and fund managers who are most
successful will be those who find a way to marry the two
don’t think this has to be a contentious right-wrong,
good-evil debate," said Berman, the wealth manager.
"The two can and should co-exist."