Active Firms May Need to Shrink Assets by Up to $10 Trillion

  • Limits seen necessary to boost returns above benchmarks
  • ‘Pretty clear’ active managers haven’t performed, Kraus says

Is It Time for Investors to Ditch Active Managers?

Active investment managers may need to shrink assets by as much as a third if they want to beat industry benchmarks, Peter Kraus, chief executive officer of AllianceBernstein Holding LP, said.

The $30 trillion industry has grown too large with the proliferation of asset-management firms and the growth of individual funds, which forced managers to maintain too many positions and undermined returns, Kraus said Tuesday in a Bloomberg Television interview with Erik Schatzker.

“It’s pretty clear that active managers have not performed above their benchmarks to any great degree,” said Kraus, 63. “Ultimately it comes down to each manager putting capacity constraints on themselves,” he said, adding that managers at AllianceBernstein all have their own limits on growth. His New York-based firm can still expand, but not more than about 20 percent to 30 percent, Kraus said. AllianceBernstein managed $483 billion in assets at the end of April.

Active fund managers have struggled to meet benchmarks, causing investors to flock to low-cost index funds. Laurence D. Fink, CEO of BlackRock Inc., said last month at the Deutsche Bank Global Financial Services Conference that he expects consolidation in the asset-management business because too many managers can’t generate returns higher than their benchmarks.

About 35 percent of actively managed equity mutual funds attained that feat in the first four months of this year, compared with 47 percent in 2015 and 26 percent in 2014, according to data compiled by Morningstar Inc. Investors pulled $179 billion from actively managed domestic equity funds and exchange-traded funds in the 12 months through April and added $127 billion to passive funds in the same category, according to Morningstar.

Watch Next: Peter Kraus on Active and Passive Management

Peter Kraus on Active and Passive Management

Hedge funds have also been criticized for performance that doesn’t justify their high fees. Hedge fund manager Dan Loeb said in April that the industry is in the first stage of a “washout,” and Blackstone Group LP President Tony James predicted last month that hedge fund assets could tumble 25 percent.

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