Page 47 - DIY INVESTOR MAGAZINE - NOVEMBER 2018
P. 47

         ‘PASSIVE IS MASSIVE’
Investors now know that the ‘free’ advice they received pre RDR was nothing of the sort, the real cost of active management is clearer and some investors have voted with their feet.
The US has the most efficient equity market in the world, making it incredibly difficult for an active fund manager to outperform; a passive strategy may ‘only’ match the return of the index, but with fees for an S&P tracker as low as 5 bps (0.05%) the net gain to the investor may be better than an active strategy that loses the benefit of any slight out performance to fees.
THE REAL COST OF ACTIVE MANAGEMENT IS CLEARER AND SOME INVESTORS HAVE VOTED WITH THEIR FEET
Morningstar found that assets in passive US large-cap strategies quadrupled, whereas assets held by active US large-cap managers grew by 30%.
Increasing numbers of investors apparently concluded that they could be paying over the odds for actively managed US equity funds with no payback in terms of improved performance.
In 2013 passive US large-cap equity funds accounted for just over half of invested assets; by mid-2018 that hit 80%.
Fees for actively managed bond funds also fell, but to a lesser degree – 10% on average - possibly because there is less competition from passive fixed-income funds.
ACTIVE VS PASSIVE MARKET SHARE
In 2013 passively managed equity funds had around one third market share; today they are approaching parity and set fair to achieve dominance. Large cap passives now account for 58% in the UK and 78% in the US.
Fixed-income funds have moved from an 80% in favour of active management to 50% now invested in passive funds; passives dominate exposure to UK government bonds where 76% of conventional gilt funds are passive and 59% of inflation-linked bonds.
Outside of these traditional areas, ETFs have been
a motive force, delivering access to areas such as emerging markets or high yield that had been ignored by the mutual fund index fund industry.
Morningstar concluded that RDR has had a positive influence, delivering greater transparency of fees, and kindled the debate around value for money; generally investors are empowered with better knowledge to understand the cost and relative merits of different investment options, and clean share classes have become cheaper.
However, it believes that despite already having been a cheaper option, passive fund providers have responded better and more quickly to the challenge by cutting fees and launching multiple funds to give access to areas
of the market that had previously been inaccessible to retail investors.
It believes that the industry has responded positively
to RDR but that much remains to be done before all retail investors fully benefit, and it called upon the FCA to ensure that legacy assets can start to move to clean share classes, in the best interests of investors that may still be paying over the odds.
This report was conducted in rising markets and it
will be fascinating to see if investors return to actively managed funds should things downturn; those that do will find that professional investment management now comes with a lower price tag.
       47 DIY Investor Magazine | Dec 2018














































































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