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Passive-aggressive? How active investing is suffering

Passive investments have seen a 73 percent increase over a six-year period to 2015, according to latest research from S&P Global.

Pointing to an increase from 11 percent of global assets under management (AUM) in 2009 to 19 percent in 2015 for passive funds, which tracks a market-weighted index or portfolio, the research includes both exchange-traded funds (ETFs) and index funds.

The report, by Angana Jacob, associate director at S&P Dow Jones Indices, shows that ETFs have been growing at an annual growth rate of approximately 25 percent over the past decade, with AUM standing above $3 trillion (£2.2 trillion). This can be seen across both retail and institutional investments. "Institutions too are increasingly using ETFs for core exposures and access to smart beta strategies."

The active-passive debate has been raging across the investment industry especially for customers who want to avoid the hassle of cherry-picking stocks and paying massive fees to traditional active fund managers. In a passive form of investing, the fund manager makes very minor adjustments in order to keep the fund in line with its index. These indices are based on various market sectors such as commodities, healthcare, financials among others. But it is the low cost structure of these funds as compared to actively managed that make them attractive to investors.

Where to invest?

With yields for traditional forms of investment at record low levels, investors hunting a return on their allocations are scrambling for other opportunities that involve lower fees and higher returns. Traditional forms of investments such as equities and bonds in developed markets fail to provide enough yields in the current times due to uncertainty surrounding Brexit. Market analysts have been advising investors to look at areas like emerging markets and other forms of investments such as index trackers that tend to pay higher returns for lower fees.

However, Jacob says fund management fees across the board - regardless of whether they're active or passive - are now falling.

"The downward trend in fees can be seen across active and passive funds, across geographies and across product categories – bonds, equities, target date and hybrid funds," S&P Global's Jacob writes. She however added that this trend is much more pronounced in the case of index funds and ETFs.

This trend can be seen in a number of surveys including one by Deloitte that showed actively managed funds in Europe charged 5 percent less in 2012 than they did in 2002, whereas that number was closer to 42 percent lower in the case of passive products.

"Low fees aside, there are other parts to the demand equation as well. Regulation has been favorable toward passive investing, with a strong push for greater cost transparency and big changes being made in how advisers and investment platforms are paid, the report says. Add to that the disappointing results from actively managed funds have driven investors towards low cost funds.

A trader monitors financial data on computers screens at ETX Capital, a broker of contracts-for-difference, in London, U.K.
Chris Ratcliffe | Bloomberg | Getty Images

While passive investing has become increasingly popular, critics of this form of investment have outlined various risks to consider. One of the risks is market volatility. Some analysts have said that index trackers offer less flexibility since index fund managers are usually prohibited from using defensive measures such as moving out of shares, even if the manager thinks share prices are going to decline.

But S&P Global's Jacob thinks that passive investment is here to stay. "While the overall asset management industry has been growing along with passive investing, the share of traditional active funds has been declining, especially those operating in the developed markets of large-cap equity and government bonds."

According to research conducted by S&P, the global AUM share of traditional active products has fallen sharply over the past decade, from 60 percent in 2003 to around 40 percent at the end of 2014.


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