Surfing a passive wave

There has been a wave of investment in passive funds over the past few years, but I think the idea that active managers are being washed out is false.

According to the Investment Association (IA), £1.7bn flowed into UK index-tracking funds and ETFs in March, almost half of all retail flows to IA funds. However, active funds still dwarf passives in total assets under management: active managers accounted for £4.39tn of total IA members’ managed assets at the start of 2016 (last measure), while passives were just £1.31tn.

Ironically, I think a good slug of the flows into passive investments over the past five years or more would have been from active managers. Passive investment vehicles are cheap, simple and usually liquid (although, not always and not all passives are created equal in that regard). Trackers and ETFs allow you to get short-term exposure to all sorts of assets very cheaply. It wasn’t so long ago that this was almost impossible to do, especially across varied assets, such as property, specific duration bonds, industries, foreign share markets and commodities. I use ETFs to get targeted exposure for short periods, whether that’s buying a Mexican equity ETF to hedge against rising oil prices or using FTSE 100 ETFs to add broad UK exposure when rebalancing portfolios.

This is really helpful! But, contrary to current popular opinion, I believe these index-trackers are only as useful as the person using them. Like a hammer, the best results are in the hands of a skilled tradesman. And you need more than just a hammer to build a house. Similarly, a lot more goes into the creation of a balanced portfolio than just one – or a collection of – indices. A good active manager is constantly monitoring correlations and performance of different assets within a fund, mandate or client account. They will also be taking into account when the client needs a withdrawal and thinking about which assets can be sold at a decent price to create the cash and which assets should be held for longer.

Many retail investors are buying and holding passives for many years or decades to get long-term exposure to markets. This is better than nothing – capital markets are the best way of making the returns most people need to fund their future, whether retirement, buying a house or putting their children through school. The danger is that passives may be riskier than many people realise. When markets are rising, passives give you strong returns for less cash in fees. But it is the same story when markets fall: passives will fall exactly in line with the market. You have zero ability to twist your investment into areas that will be less affected or avoid any bankruptcies that are within an index, even if they are glaringly obvious.

Many people may see the wave of passive investment and think they should join it. But I wonder how much of this cash flowing in is a wave of retail investors and how much is actually active managers surfing along the top.

If you’re riding the wave, you can adjust and better avoid the smashing foam when the wave breaks. You can’t do that if you are the wave.

David has written a report exploring how active managers can reclaim the high ground in asset management and why active investing may be better suited to the challenges of the years ahead. If you would like to know more, please call 020 7399 0399 or email us.



Important legal information

This area of the site is for professional advisers

Please read this page before proceeding, it explains certain legal and regulatory restrictions applicable to the distribution of this information. It is your responsibility to inform yourselves of and to observe all applicable laws and regulations of the relevant jurisdiction.

This section of the website is directed only at investment advisers and other financial intermediaries who are authorised and regulated by the Financial Conduct Authority (FCA).

The information provided in this site is directed at UK investment advisers only and must not be circulated to private clients or to the general public. It does not constitute an offer to sell, or solicit an offer to purchase any investments by anyone in any jurisdiction in which such offer or solicitation is not authorised or in which a member of the Rathbone Group is not authorised to do so.

I confirm that I am an investment intermediary authorised and regulated by the Financial Conduct Authority. I have read and understood the legal information and risk warnings below:

Important Information (Terms and Conditions)

The information contained on this site is believed to be accurate at the date of publication but no warranty of accuracy is given and the information is subject to change without notice. Any opinions or estimates included herein constitute a judgement as of the date of publication and are subject to change without notice. Furthermore, no responsibility is accepted for the accuracy of any information contained within sites provided by third parties that may have links to or from our pages.

Rathbone Investment Management Limited ("RIM") is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered Office: Port of Liverpool Building, Pier Head, Liverpool L3 1NW. Registered in England No 01448919.

In accordance with regulations, all electronic communications and telephone calls between Rathbones and its clients are recorded and stored for a minimum period of six months.

The information provided in this site is directed at UK investors only. It does not constitute an offer to sell, or solicit an offer to purchase any investments by anyone in any jurisdiction in which such offer or solicitation is not authorised or in which a member of the Rathbone Group is not authorised to do so.

In particular, the information herein is not for distribution and does not constitute an offer to sell or the solicitation of any offer to buy any securities in France and the United States of America to or for the benefit of United States persons (being resident in the United States of America or partnerships or corporations organised under the laws of the United States of America or any state, territory or possession thereof).

In order to comply with money laundering and other regulations, additional documentation for identification purposes may be required.

Rathbones shall have no liability for any data transmission errors such as data loss, damage or alteration of any kind including, but not limited to, any direct, indirect or consequential damage arising out of the use of services provided or referred to in this website.

Past performance should not be seen as an indication of future performance.

The value of investments and the income from them can fall as well as rise and you may not get back the amount originally invested, particularly if your client does not continue with the investment over the longer term.

Changes in the rate of exchange between currencies may cause the value of an investment to go up or down.

Interest rate fluctuations are likely to affect the capital value of investments within bond funds. When long term interest rates rise the capital value of units is likely to fall and vice versa. The effect will be more apparent on funds that invest significantly in long dated securities. The value of capital and income will fluctuate as interest rates and credit ratings of the issuing companies change.

Tax levels and reliefs are those currently applicable and may change and the value of any tax advantage will depend on individual circumstances.

Investing in emerging markets or small companies may be potentially volatile, as these investments are high risk.

The design, text and images are owned, except as expressly stated by members of the Rathbone Group. They may not be copied, transmitted, displayed, performed, distributed, licensed, altered, framed, stored or otherwise used in whole or in part or in any manner without the written consent of Rathbones except to the extent permitted and under the procedures specified in the copyright Designs and Patents Act 1988, as amended and then only with notices of Rathbones' rights.

Rate this page:
No votes yet