Greenwich Associates: Active Management Can Thrive in Certain Niches

It seems that active management is on the wane, with a recent report from Moody’s Investors Service, for one, finding that passive investing through index funds and ETFs will be predominant in the US by 2024. Greenwich Associates, however, expects that active management still has a role in the future.

According to the Stamford, Conn., financial research firm, investors are moving their funds to passive avenues as a result of active managers’ not being able to outperform benchmark indices after accounting for manager fees. “These results have caused many industry pundits to conclude that some markets—particularly highly liquid markets like US equities— no longer provide sufficient opportunities for alpha generation. As such, they believe the best way to invest in these areas is through passive strategies that deliver market exposure at the lowest possible cost,” Greenwich reports .

And this move to active management is not tied to the economic cycle, but is more of a fundamental long-term trend. However, there remain some justifications for active management to continue to thrive. For instance: the overall growth in the money that institutional investors worldwide have available to invest. Also, not all markets are amenable to passive investment strategies. Some of them remain “complex, opaque and illiquid” and active management can play a bigger role here, Greenwich says.

Active managers can continue to deliver value by developing new strategies. And active managers can take advantage of “new distribution and client engagement models” to facilitate their client interactions, Greenwich says, nothing that although the profit margins for active management have been declining, they are still healthy compared to those for other industries.

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Greenwich expects that not all active managers will be winners though, and the move to passive management will also pose a threat to some. Those who will emerge winners will have the advantage of working with clients in a complex area where they have some special insight or superior information. They could also help their clients with intricate challenges and add value in a way that justifies their cost.

Those who will not be successful will “stick to traditional, product-centric approaches.” For instance, there are a number of asset classes that are becoming more liquid but that institutional investors don’t see as offering much opportunity to generate excess returns in, on a risk-adjusted basis. These managers would be better served by developing ways to differentiate themselves or going for new products in other areas.

Morgan Stanley also expects that it’s too early to sound a death knell for active management. Lisa Shalett, Morgan Stanley’s head of investment and portfolio strategies, wealth management, blogs that while active managers have had a tough time in the past several years, as money flowed to passive management strategies following the financial crisis, it’s likely that better days are ahead.

Shalett says, “We are in the early stages of a major regime shift, from monetary to fiscal policy; deflation to inflation; and low volatility to high volatility. History suggests that this is when active managers have the best potential to find mispriced securities and earn their keep.”

By Poonkulali Thangavelu

An ongoing overpayment to one pensioner from the Milwaukee County Retirement System that amounted to $140,000 over several years has cost the head of that system her job and ignited calls for the city pension system to be turned over to the state for new management.

The mistake has forced the system’s head,, county retirement plan services director Marian Ninneman, to resign. The story, reported in the Milwaukee Journal Sentinel, said Ninneman was informed of the mistake about three years ago, but apparently failed to take corrective actions.

The newspaper reported that when Ninneman was informed about the overpayment to an individual in April 2014, it already had been going on for more than a year, county risk management director Amy Pechacek said. Pechacek found the mistake and reminded Ninneman of the error in May 2016, but again the director took no corrective action, she said. Since Ninneman’s resignation, Pechacek has been named interim director of the pension fund.

Meanwhile, the recipient of the overpayments, the spouse of a deceased county employee, was notified about the mistake and been asked to repay the county. If that fails, the county is considering cutting future beneficiary payments to the spouse in an effort to recover the money.

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The system issues 8,150 checks monthly and an outside auditing firm, Baker Tilley, has been hired to work with the county comptroller to gauge the extent of payment errors, according to County Executive Chris Abele.

More Bad News for Milwaukee

This is the second large mistake for the Milwaukee system. Three months ago, the county had to pay out $11 million to compensate for pension underpayments to nearly 1,300 county retirees that started 15 years ago.

Those mistakes, made between 2001 to 2008, occurred after county pension office workers used the wrong mortality table to calculate payments. At that time, Ninneman was not the fund’s director. She became director in January 2011, a few months prior to Abele’s election as executive in April 2011.

Earlier, the Milwaukee system had to make an additional $20 million contribution to the pension fund in 2016 to correct for previous actuarial errors and a Pension Board decision to shorten the period for fully funding the county’s pension liability from 30 years to 20 years.

Also, earlier this year a report said four retirees received lump-sum checks exceeding $1 million in addition to regularly monthly pensions because so-called “backdrop payments” were paid.

Backdrop payments are bonuses paid to workers who continue to work past their retirement date. Milwaukee County has paid out more than $294 million in backdrop bonuses to retirees since 2001.

In 2015, the fund also made the news when its actuary miscalculated the 2015 contribution which was $38.3 million less than it should have been. The actuarial consultant, Buck Consultants, LLC in Chicago, did not include a cost-of-living adjustment paid to retirees each year in the plan’s overall funding requirements, according to reports.

County Supervisor Sheldon Wasserman, vice chair of the board’s Finance Committee, is pushing to merge the county pension into the state system. Currently, the Milwaukee system is the only county in Wisconsin with its own pension system. Wasserman said he is drafting a resolution to turn Milwaukee County’s independent pension system over to the state. “The county has to get out of the pension business,” Wasserman said in a Journal Sentinel article.

The Wisconsin Department of Employee Trust Funds administers retirement, insurance and other benefits for state and local government employees.

The Milwaukee County Retirement System paid out over $212.5 million in monthly pension benefits in 2016, records show. As of Dec. 31, 2016, the market value of the county pension fund was more than $1.66 billion.

When asked about the resignation, Milwaukee County Executive Chris Abele said: “While the system is currently sustainable and retirees can feel secure about the promise of their earned benefits, I want to take steps to ensure that future employees and retirees have that same security. I also want the taxpayers to feel confident that their dollars are being managed wisely.”

Milwaukee County’s Risk Management Director, Amy Pechacek, who is also serving as interim director of the retirement system, added, “The pension system is complex as there are literally hundreds of different benefit calculations. While substantial improvements to our system have been made over the past recent years, we need to continue to increase standardization and auditability of procedures, as well as transparency. We will work with independent auditors to correct this particular overpayment and to identify areas for process and systems improvements. We will also perform stress-testing on the system as a whole to prevent future errors as much as possible by employing best-in-class practices.”

By Chuck Epstein