Putnam Investments President and CEO Robert Reynolds said Thursday there is a danger the pendulum has swung too far to index funds and other passive investments.
The trend may reverse itself because active managers historically tend to outperform the market when interest rates rise, he said during a panel discussion at the Mutual Fund Directors Forum in Washington, D.C.
Reynolds said active management would always have a place in portfolio construction, adding that investors need to be made more aware of the risks in index funds.
“Every collection has certain risks,” he said, pointing out the S&P500 has a large-cap stock bias and is vulnerable to changes to market momentum.
Financial advisors are still gun-shy about moving assets in and out of their portfolios six years after the 2008 financial meltdown, he said.
“Advisors are very risk adverse. They can’t have any blowouts.
Unless there is a major reason they are not going to move their money around,” said Reynolds.
Speaking on the panel with Reynolds, Northern Trust Client Solutions Global Head Jason Tyler said passive fund managers are seeing more pressure to reduce fees than active managers.
He noted clients will call a passive manager and say “you’re doing a great job, but your competitors are calling willing to do the job for half the price.”
Tyler said the trend to passive investing is much less prevalent in fixed income than equities because a higher percentage of managers outperform the market in bonds than in stocks and because the competition is less.