Biggest U.K. Index Manager Eyes a Future That's More ActiveBy
LGIM says clients need better returns than passive can provide
CIO sees factor investing blurring lines between strategies
Legal & General Investment Management may be the U.K.’s largest manager of index funds, but it doesn’t want to be pigeon-holed as a passive investor.
Executives at the $1.3 trillion money manager say its focus is to build out the active business, even though the company just did a deal that will see it sell exchange-traded funds for the first time.
“We are tilting incrementally toward more active than passive,” Nick Hartley, co-head of LGIM’s $9.7 billion active-equities unit, said in an interview. “We are hiring.”
This is a strategy that stands out in an industry that’s losing money to ETFs and cheaper passive strategies, which have benefited from a stocks boom triggered by unprecedented quantitative easing. But then, the investment unit of U.K. insurer Legal & General Group Plc has always embraced passive -- even as it recognizes the benefits of active strategies.
LGIM has been hiring from competitors, including BlueBay Asset Management and Lombard Odier, to expand existing teams as well as to create new heads of businesses. Stephen Gray joined from Axa Investment Managers as head of wealth management and Helena Morrissey, former CEO of Newton Investment, was named head of personal investing. Both were new positions for the firm.
Passive investing is on the rise, with investors pumping a record $510 billion into index funds this year through September, compared with $104 billion for active funds, data compiled by Bloomberg Intelligence show.
At LGIM, demand for passive investing has boosted the assets of its index-fund business to $481 billion, making it among the world’s largest providers. Still, Hartley said the firm’s pension-fund clients increasingly need more than the returns generated from passive products alone.
“Our clients probably need a bit more than just beta,” Hartley said.
LGIM’s active business, which includes about $192 billion in fixed income, already accounts for more than half of the firm’s total revenue, said Chief Investment Officer Anton Eser, who oversees both sides of the business.
Eser sees the lines between passive and active blurring, with a growing number of clients showing “a genuine interest” in factor investing -- which uses quantitative models to try and deliver market-beating returns without the expense of active stock-picking.
The company already manages 33 billion pounds ($44 billion) in factor-investing products, also known as smart beta, which makes it Europe’s largest manager in this area, Eser said in a separate interview.
As for which side of the business will prevail, LGIM isn’t giving up on passive, and last week agreed to buy Canvas, a $2.7 billion ETF platform with a distribution license in 14 European countries.
“The risk is you get pigeon-holed for one asset class for having such a large passive business,” Head of Retail Sales Simon Hynes said. Yet, “for a global firm with aspirations like we have, you can’t not play in active. It’s a must-do.”