An ASIC report notes the boom in demand for this asset, saying it heightens the need for “better-quality data” about the size of this sector where estimates range between $1.8 billion and $188 billion.
CPA Australia has weighed into the debate about the cost to oversee the industry, adding its voice to those who argue the fee structure favours the larger funds.
Why the smart money is backing active management
As the active versus passive investment debate continues, one crucial advantage of active management is often overlooked – the power of in-depth, fundamental research to generate alpha.
Unlike passive strategies that merely track an index, active investment management is rooted in the pursuit of outperforming the market. It relies on identifying mis-priced securities, navigating market inefficiencies and managing risk with surgical precision.
At the core of this approach is a disciplined commitment to detailed research – both into individual companies and the broader sectors and trends that shape their operating environments.
Fundamental analysis remains the foundation of this effort. By analysing key metrics such as return on equity, profit margins and debt-to-equity ratios, active managers can assess a company’s financial health and its ability to withstand economic stress.
Equally important is evaluating the quality of management – a factor often under-appreciated by the market but critical to sustained operational success. Effective leadership can be the difference between a company that merely survives to one that consistently outperforms competitors.
Active managers also pay close attention to a company’s “moat” – its sustainable competitive advantage. As US academic and businessman Michael Porter famously argued in 1985, companies with strong, defensible business models tend to deliver superior long-term returns.
Whether it’s through proprietary technology, high brand loyalty or dominant market positioning, companies with such moats are prime candidates for alpha generation. Active managers aim to find these companies before the broader market fully appreciates their value.
Another compelling strength of active management lies in its ability to identify and capitalise on market inefficiencies. Markets are not always rational. Sentiment, herd behaviour and information asymmetry often lead to mis-priced assets. By leveraging thorough research and independent thinking, active managers can identify undervalued securities – often before the rest of the market.
But alpha isn’t just about the correct picks – it’s also about avoiding the wrong ones. Risk management is a cornerstone of any successful active strategy. Skilled managers know that capital preservation is just as important as capital growth. Avoiding under-performing companies or sectors, particularly during periods of economic uncertainty, is a key driver of long-term out-performance.
Macro and sectoral awareness further bolsters an active manager’s toolkit. Understanding how different sectors perform across market cycles allows managers to pivot away from areas of vulnerability and towards those with resilience or emerging strength.
For instance, during downturns, healthcare and utilities often hold up better than consumer discretionary or cyclical sectors. Anticipating these shifts can make a meaningful difference in portfolio performance.
Sentiment-driven over-valuation is another trap that active managers are well-equipped to avoid. When exuberance inflates stock prices beyond fundamentals, it often ends in disappointment. Through rigorous analysis, active managers can steer clear of over-hyped assets, shielding investors from inevitable corrections.
Moreover, thematic investing is an area where active managers can truly shine. By identifying long-term structural trends – digital transformation, clean energy or demographic shifts – they can position their portfolios to benefit early. Identifying these themes before they become mainstream provides a window of opportunity that passive strategies often overlook.
Conversely, active managers are also adept at avoiding sectors in structural decline. For instance, traditional bricks-and-mortar retail has struggled in the face of e-commerce disruption. By recognising these secular headwinds through thorough sector analysis, active managers can avoid value traps and allocate capital more effectively.
The reality is apparent: when executed with discipline and insight, active management can deliver meaningful out-performance. Deep research, selective investing and agile risk management are not just theoretical advantages – they are practical tools that, when used effectively, generate alpha and create value for investors.
