David Chaplin 's Opinion

A personal finance columnist for the NZ Herald

Inside Money: The bother of being active

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There's been a big shift from active to passive investment management. Photo / Thinkstock
There's been a big shift from active to passive investment management. Photo / Thinkstock

According to a Financial Times (FT) article published this week, active funds management is facing a below-benchmark future.

"Active equity management," the FT story says, "it seems, is simply not going to rebound as sharply in this cycle as previously".

Ironically, the FT article was profiling one of the most active of investment managers, hedge fund legend John Paulson, whose 'Recovery' funds have returned 40 per cent this year, in part by investing in asset managers.

Paulson, however, has been selective in which fund managers he backed, focusing on the private equity sector where managers are "once again able to charge performance fees on top of regular management fees".

Your more regular active equity fund managers are losing out in that regard, the FT story says, mainly because of "the secular shift from active to passive management".

"Inflows boosted assets under management at BlackRock's iShares exchange traded equity funds [ETFs] by 3.6 per cent in the third quarter, compared with a meagre 0.7 per cent into actively managed retail equity funds," the FT noted.

But if active is passe, other figures from BlackRock suggest that passive could be on its way to becoming the new active.

In its October edition of 'ETP [Exchange-Traded Product] Quarterly', BlackRock says flows "whipsawed throughout the quarter, mirroring market expectations for the direction of US monetary policy" - indicating many investors are using ETPs (of which ETFs are the most common variety) as short-term bets rather than as passive buy-and-hold index instruments.

The BlackRock October report focuses on so-called sector ETPs - products structured around market segments such as financial companies, real estate or healthcare - that account for 15 per cent (or US$262 billion) of the global share-based ETP holdings.

About 70 per cent of the ETP sector funds are US-centric, where the products now constitute "36% of total US sector fund assets, more than double their 16% market share of all US equity fund assets".

As the BlackRock report says, however, different investors hold "different sector ETP s for different reasons... there is the mix of buy-and-hold investors and those implementing short-term views ranging from minutes to months".

"Also consider the multitude of products," the report says. "'Inverse', or short, ETP s can help investors hedge exposures and profit in declining markets. Leveraged ETP s can turbo-charge returns (up and down)".

All of which suggests that the rising popularity of ETFs (or ETPs if you want to be pedantic) is not simply about investors searching for low-cost, index returns.

The ETF trend, too, has largely passed by New Zealand equity markets - and maybe for good reason. According to the September 2013 investment survey by Melville Jessup Weaver (MJW), even the worst of New Zealand share fund managers has managed to beat the benchmark over the previous 10-year period.

Global share managers haven't been quite as successful, the MJW report says, with 10-year returns (of the managers MJW surveyed, which is most of those available here) converging on the index and cost a clear concern.

"... the fees for active management, including in-fund expenses can range between 70 and 90 bps per annum," MJW says. "In contrast the index funds for the larger mandates could be as low as 10 bps. The difference is substantial and represents a serious hurdle for active funds to overcome."

David Chaplin

A personal finance columnist for the NZ Herald

David is a freelance journalist who has covered the financial services business on both sides of the Tasman for over 15 years. David has edited magazines and websites for the financial advice, investment and superannuation industries. Today, he contributes to various publications in Australia as well as his bi-weekly blog for the NZ Herald under the 'Inside Money' banner.

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