Ash Williams: Passive Investing’s Use Is an ‘Illusion’ That’s Now Dispelled

It’s a creature of another time, and active management is needed for today’s challenges, the investment legend argues.


Today’s complex markets, coming off a rare simultaneous bear run for both stocks and bonds in 2022, need a good dose of active management, according to Ash Williams, retired CIO of Florida’s State Board of Administration and now an adviser and vice chair at J.P. Morgan Asset Management.

“Very simply, the less efficient markets are, the more likely one is to be rewarded for active management,” he told Jared Gross, the firm’s head of institutional portfolio strategy, in an interview published in a company newsletter.

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Active management is useful nowadays for a whole gamut of assets, both mainstream and not, Williams said. This ranges, he explained, from “the least transparent, liquid and efficient—think frontier equities or frontier sovereign debt, where active management is nearly mandatory—to the most liquid developed market securities; think U.S. large cap equities, where it is less so.”

An “illusion” was created after the global financial crisis of 2008 and 2009, Williams explained, “that passive is the way to go.” This notion, he said, is a very “naive presumption.” The post-crisis climate was “an unprecedented period in which increasing globalization, disinflation and accommodative policy created a rising tide lifting all boats. That tide has now turned.”

These days, with deglobalization, high inflation and a Federal Reserve bent on hiking interest rates, yesteryear’s broad market gains and the passive investing that rides on them are gone, Williams insisted.

One area thriving at the moment is core bonds—Treasuries, investment-grade corporates and a whole panoply of others, such as mortgage-backed securities—where, he said, active management “can enhance returns and reduce risk across time.”

Another promising area, in Williams’ view: offshore markets, which are cheap, thanks to the strong dollar. “I think that parts of Asia, and China in particular, may be good opportunities,” he stated.

Moreover, Williams suggested, “Closer to home, there should be opportunities within tech, which has been seriously beaten down, as well as within health care.” What’s needed with stocks in these sectors, though, is a canny active manager, he noted, one who is “adept at navigating the equity opportunity set—and not simply chasing the momentum trades.”

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OCIO Industry Set for Strong Growth, Alts Expansion

One out of four asset owners expect to use an outsourced chief investment officer in the next two years, says report.

 

Approximately 25% of asset owners expect to use an outsourced CIO in some capacity over the next two years, says a new report from research and consulting firm Cerulli Associates.

According to the report, which polled 172 institutional asset owners, 14% said they expect to begin using an OCIO relationship, and 11% expect to expand the use of OCIO by moving from a partial portfolio to a total portfolio mandate or by adding other asset pools that are currently managed in-house. Only 6% said they expect to reduce or stop using OCIO services.

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The report also indicates that many institutions could move to a model in which the OCIO provider has full discretion , and that asset owners plan to increase allocations to emerging markets debt, private debt, infrastructure and real estate investments.

“Asset owners are increasingly drawn to the OCIO model for the management of sleeves for alternatives and private asset classes for which they do not think they have the appropriate level of expertise,” Laura Levesque, an associate director at Cerulli, said in a release. “Given market conditions, these asset allocation trends are in line with what Cerulli would expect—all four asset classes provide some level of diversification from other public market investments.”

OCIO assets under management are expected to grow at an annual rate of 5.5% during the , up from $2.4 trillion at 2021 year-end. However, the growth rates vary significantly by client type, from 3.1% for corporate defined benefit clients to 10.2% for foundations. The report also found that the top 10 OCIO providers by AUM account for approximately 45% of the total OCIO assets managed in the U.S, while the top 20 account for about 65% of the market.

The asset owners polled said the most mentioned topics of interest over the next year are allocation questions (77%), followed by questions concerning current portfolio holdings (69%). Although Cerulli expects new OCIO adoption to remain strong, the report said that capital markets expectations will be a headwind to asset growth.

Key services sought by asset owners from OCIO providers, aside from managing alternative asset classes, also include risk analytics, bundled plan administration and online portal access, according to the report.

“Asset owners want access to how their investments are performing at their fingertips,” Levesque said in the release. “OCIO providers that can offer granular transparency with anytime, anywhere access to investment performance will be well-positioned to win mandates.”

 

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