FOX is continuing apace.Not only is the trend away

FOX family offices confirm this trend.  Within the public equity allocation, (44% of the portfolio), respondents stated that only 51% is in actively managed mutual funds or SMAs.  Most of the rest is managed passively, or holding individual securities.  (GIS Survey data, 2017).The move away from active management is directly related to the overall poor fee-adjusted performance of active managers, relative to indexed benchmarks.  It can certainly be argued that the tremendous increase in valuation-indifferent and “growth-y” passive strategies is a potential risk for equity investors, and others may say that the markets are ripe for active management after a long run of low volatility in many markets.  Nonetheless, investors are voting with their capital, and the move to passive strategies is continuing apace.Not only is the trend away from active management upending the asset management industry, but it is deeply disrupting the wealth advisory industry, as well.   Clients pay investment advisors primarily for two services:  an “optimal” asset allocation, and the suggestion (if non-discretionary) or selection (if discretionary) of mostly active managers within each asset class.  Just as many clients’ have less conviction in the “precision” of an asset allocation model, they are also questioning the need for higher fee active managers relative to the benchmarks, and in many cases, choosing to just “own the benchmark” itself.  Anecdotal evidence also suggests that many investors are moving away from non-discretionary investment “consulting” services, and asking their advisor to take discretion, so that they can better hold them accountable for performance.The movement toward “commoditization” of fund management – where active management is beaten out by simple indexed strategies – is also leading to tremendous fee compression.  As an astute observer of the fund management industry has predicted “Active managers will have a significantly smaller share of a business that is gradually only gradually – and there will be a relentless pressure on fees”.  Source: Laurence B. Siegel, A Prediction for the Future of Active Management – Articles – Advisor Perspectives.  Published January 3, 2017.This leads to a “commoditization spiral”, as the distinctions between fund approaches becomes harder to recognize, low cost funds become even cheaper, active managers have a higher performance hurdle to overcome and cut their own fees: a classic “race to the bottom” in fees.