Returns, low fees see growth of passive
Global inflows into passive equity funds for the 12 months ending July 2017 amounted to $514bn, according to EPFR Global. “In contrast, more than $519bn flowed out of active equity funds,” says Fazila Manjoo, head of research at Stanlib Index Investments.
It’s a defining theme in global asset management at present, driven predominantly by two factors — returns and lower costs.
According to S&P’s SPIVA South Africa Scorecard, more than 93% of local actively managed equity funds failed to beat the market over the fiveyear period ending December 31 2017. Add to this the impact that paying 1% more each year in investment management fees can have on real returns by the time investors reach retirement and the advantages of passive investments such as index funds and exchange traded funds (ETFs) become clear.
“Reducing unnecessary costs can have a dramatic impact on investment outcomes over the long term, because as much as half of an investor’s savings can be eroded by fees,” says Manjoo. “That’s substantial. So, given the choice, more investors are opting for lowerfee passive investment options.”
Increased regulation and a lower growth environment also increased the focus on fees.
Quantitative trading strategies — a hot topic for academics and practitioners — are also fuelling growth in ETFs, continues Manjoo. “These are ideal vehicles to use in computer-generated portfolios. Advances in technology have also allowed for large-scale customisation in ETFs that satisfy a range of desired investment outcomes.”
While this is good for investors, there’s a downside for active fund managers. “Computing and technological advances mean access to information is instantaneous, making it difficult to generate returns that beat the market.”
However, while Manjoo expects passive investing to substantially increase in market share, mirroring the global trend, she doesn’t believe active investing will disappear.
“There remain market environments where it’s advantageous to actively pick stocks, especially among managers skilled at spotting overpriced and underpriced stocks or market segments.”
Given the new paradigm, Manjoo believes investors who construct portfolios with a blend of active and passive investments will have the best opportunity to outperform the market index, reduce risk of underperforming, and reduce investment costs.