UBS handed $13bn passive mandate by AMP Capital
UBS is to manage a massive AUD17bn ($13bn) of passive funds for Australian asset manager AMP Capital, making the Swiss bank the overseer of one of the largest mandates  in the nations' history. UBS will manage 11 equity and bond funds using smart beta strategies. The move to the low-cost management structure is seen as a sign of a move to more passive investment by Australian firms, said AMP CIO Sean Henaghan.
"Australia is more cost conscious and you are going to see more passive here," he said.

But the mandate, Mr Henaghan said, did not signal a move by AMP Capital, which has total assets under management of $165.4 billion, towards passive investing.

Remained defiant

Instead it would provide the fund with the tools or building blocks to implement its strategies in various products. The fund announced in March that it would divest from $600 million worth of shares that failed to meet its new ethical framework.

He remained defiant that the role of active managers was as important as ever and that the industry had to move away from its obsession of trying to outperform benchmarks.

"There's a bigger industry issue – which is that fund managers have been managing business risk rather than putting the member at the heart of the investment process."

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UBS Asset Management's Australian head Bryce Doherty said the funds would be managed out of the Sydney office.

Passive strategies will now account for 40 per cent of the assets managed in Australia by UBS Asset Management.

"The real drive to passive has been the result of two factors – one is of course the lower fee and the second is the belief that the active manager can't add value above their fee over time.

"We wouldn't agree with that [belief]. But if clients are doing their own portfolio construction and they need people to provide them with passive building blocks, we are able to do that."

The mandate also highlights that the concept of passive investment itself is somewhat of a misnomer.

Investors still need to decide whether to invest in passive strategies and to set their appropriate asset allocation. Passive investors also have to be aware of changes to the underlying securities and adjust their portfolios in anticipation.

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Competition brutal

Mr Doherty described competition in the asset management sector as "absolutely brutal" with investment fees among the most competitive in the world.

"There is over $2.2 trillion in the super system and it has attracted a lot more fund managers than you would typically see for a country with 24 million people," he said.

He pointed to the large-cap Australian equities space where 167 managers competed for business.

"It is quite amazing as most of them are running ASX 100 mandates [so] there are more managers than there are stocks."

The pool of super has also created a pool of skilled investment talent, and the increased adoption of passive investing would force change.

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Mr Doherty said the trend among large institutions to internalise more of the investment process brought with it both investment and operational risk that had to be weighed up against the cost of outsourcing.

But he said there was no denying the disruption of low-cost passive investing which has forced changes within the asset manager.

"We have closed a number of our retail products in the last three years that found themselves in 'no-mans land' – where the strategy was delivering a very small out-performance against the benchmark with an active fee."

That led the fund to focus on a barbell approach of managing passive products and highly active products that were able to deviate "meaningfully from the benchmark".

Benchmark indices which track the broad market returns for a range of asset classes in various jurisdictions were adopted in the 1970s by consultants to measure the performance of fund managers.

Defining success

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The importance has increased ever since and now with the rise of exchange traded funds trillions of dollars of capital are invested to replicate their returns while fund managers religiously track them and attempt to beat them to win assets and earn performance fees.

AMP Capital's Mr Henaghan says benchmarks are "now a big part of the problem in the industry" because they have impacted the way "we define success" and created a "misalignment across the value chain".

He said AMP's new generation of funds would not aim to beat a performance benchmark but to achieve a specific targeted outcome set by the investor.

"What end members basically want is their money to grow in real terms, no large drawdowns or an income stream," said Mr Henaghan.

"You have to create an ability to use research and nous to put together a portfolio of stocks to generate an outcome."

Mr Doherty says he expects "a very interesting shake-up" between large managers with scale and more smaller investors with specific skills in response to fee pressures that have been compounded by the rise of passive investing.

"Then there is the chunk in the middle. It will be very difficult for them over the next five years."