(pictured: Amin Rajan)
The drift to indexing in the US has accelerated over the last three years with passive products now representing a third of the managed fund market, the ‘Financial Times’ (FT) reported last week.
According to the report, new figures supplied by Morningstar show passive funds have seen US market share grow from a quarter in 2013 to a third at the latest count.
Over the three-year period US index fund investments have increased by US$2 trillion to now top US$5 trillion, outpacing the active sector which saw funds under management grow 14 per cent to US$9.8 trillion.
Amin Rajan, head of UK-based consultancy Create Research, told the FT that the rapid rise of indexing in the US was “very worrying” for active fund houses.
“Passive fund houses are scoring direct hits at the revenue streams of active managers,” Rajan said. “There are fears that some investors may never return to active once they switch.”
However, he said the rush to passive investing could amplify index volatility while also increasing concentration risk – or the distortion of stock prices as they join a benchmark.
“Indices are becoming ‘dumb’ as they gain in popularity, making a reversal inevitable eventually,” Rajan told the FT. “No one knows at what stage indices become seriously dumb.”
Research published by Standard & Poors (S&P) this July found that in the US equity markets “the overwhelming majority of active managers, both retail and institutional, lagged their respective benchmarks”.
“Overall findings suggest that on a gross- or net-of-fees basis, the US equity space poses meaningful challenges for active managers to overcome,” the S&P report says.
However, the study based on S&P’s half-yearly Index Versus Active scorecard (SPIVA) found international share fund managers – especially in the small cap sector – did generally outperform the index.
“Observations from previous SPIVA US Scorecards also show that international small-cap equity is one area of international equity investing where active management has fared quite well historically,” the study says.
“Managers investing in emerging markets equities, which have traditionally been thought to be one area where active management can add value, draw parity with passive indices. Nearly one-half of these managers delivered higher excess returns than the broad-based benchmark.”
While S&P does not produce an NZ SPIVA analysis, the index provider’s latest Australian report found active managers tended to underperform the benchmark over longer periods.
“As of December 2015, the majority of Australian funds in all categories, except Australian mid- and small-cap funds, were outperformed by their respective benchmarks over the five-year period,” the S&P report says. “International equity and Australian bond funds had the highest rates of funds underperforming their respective benchmark indices.”
– David Chaplin, Investment News NZ