2017 is a difficult year to be an active fund manager. Passively managed products have well and truly taken off.

Exchange traded funds (ETFs) have grown to amass US$4tn in assets globally, up from US$1tn in 2009. One fifth (22%) of publicly traded shares in the US equity market are now owned by passively managed funds. Like retail, media and transportation, the funds management industry has felt the force of disruption.

While these numbers spell gloom for active managers around the world, the US market is ahead of the curve. ETFs held $26.1bn in assets in Australia at the end of February this year, up 20% from the previous year. While growing, the rate has been slower in part due to lack of understanding in the Australian market about what an ETF is, and hence lack of confidence to invest in one.

CoreData is currently undertaking investor research on managed funds and ETF products, and in addition to uncovering the need for education of the masses, the research revealed the early movers into ETFs speak about them in glowing terms and generally consider them superior to the expensive, actively managed alternatives.

Low fees are the primary driver of growth in the ETF space. Most ETFs are available at a cost 10-15 times less than actively managed funds. However, their relative performance has assuaged concerns among some investors that ‘you get what you pay for’.

Research conducted by S&P Dow Jones Indices found that only 10% of Australian managed funds outperformed their benchmark index over the three years to the end of 2016. Active managers aren’t expected to beat their index every quarter, but these statistics offer damning insight about whether managed funds can continue to compete.

The scandals afflicting other parts of the financial services industry in Australia haven’t helped the cause of funds managed by banks or bank affiliated companies. However, amongst all this doom and gloom, many investors still believe that the market can be beaten, with quality analysis and portfolio selection. These same investors reject the notion that complete diversification is inherently beneficial and back themselves or someone else to pick winners from losers based on fundamentals.

How can active managers ensure that such heads are not turned by low-cost ETFs? The key lies in, as is the case with most technologically-disrupted products, building a personal relationship with your clients. The analysts and the processes behind asset selection are the difference and the advantage of active managers.

The experience of one investor CoreData interviewed attests to this. Looking to build knowledge and confidence in investing, the investor was led to a seminar run by a provider of managed funds. It was there that she learnt the seven-part criteria underlying any investment selection, and that should any one of the seven criteria fail, the asset was divested.

The investor, confident in the process and now aware of how investments were chosen, subsequently invested in the fund – and remains an investor nearly 20 years later, despite the ups and downs. More important to this investor than one or three-year returns (results indicative of luck more than investment acumen) was the investment selection process. For her, it was important to understand why she was paying 1, 2 or 3% on her investment.

It’s likely that the breakneck growth of ETFs will continue over the next decade. However, active fund managers have an opportunity to carve out a segment of the market for themselves.

To do that, managers must demonstrate to investors what they’re receiving for the fees they pay and why that’s better than investing in the market index.