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The passive attack & the revenge of active managers

The rise of the passives looks unstoppable. Since 2008, assets in exchange-traded funds have increased from $772bn (€685bn) to almost $4trn, according to BlackRock. But this doesn’t mean active managers are cornered.


PA Europe

Active managers have been in the frontline of the passive assault for a number of years, with investors shifting money from expensive active funds to cheap index trackers, especially in US and Japanese equities. European equities remained under active manager rule until last year.

But 2016 was a year of disaster: a record €58bn was taken out of actively managed European domiciled European equity funds over the year. These outflows were mainly due to deteriorating sentiment, but redemptions from European equity ETFs were only a fraction of those from actively managed funds (at slightly over €4bn). The question is, of course, whether active managers will ever see this money flow back in again. 

Turning tides

Are ETFs a virus that will infect, if not kill, active managers across all asset classes? Everywhere, passive solutions undoubtedly are taking in money that would have otherwise gone to active funds. But net flows into active funds are still higher than those into ETFs, though the gap is shrinking. According to Morningstar data, net inflows into active funds decreased from €420bn in 2014 to €88.6bn in 2016. Over the same period, ETF net flows increased from €43.7bn to €47.8bn.

But ETFs have been attracting the bulk of their new assets in only a limited number of asset classes, and have mainly been successful in the equity space. In fact, more than three-quarters of assets in exchange-traded products (ETPs) are in equities. And that percentage has held pretty constant in recent years. In fixed income, active managers continue to dominate for now, though passives are making inroads in this space, too. 

Decision time

Rico Bosma, a fund analyst at Wealth Management Partners in The Netherlands, adopts a pragmatic approach when it comes to deciding on an active manager or an ETF. 

“We want some passive investments in all equity asset classes from an asset allocation perspective, but otherwise we take an open approach,” he says. 

“When we look for a new fund, we screen the whole universe, including ETFs and active funds. In US and Japanese equities, the best-scoring funds in terms of performance tend to be ETFs, so in these asset classes all our investments are passive. But in emerging market equities, active managers score best.”

Anders af Hällström, a fund selector at the Finnish multi-family office Aval, agrees with Bosma. “We have some ETFs in most equity asset classes, but in emerging markets we only use active managers. The market is not as efficient, the index is not reliable and EM is a very wide universe, so active managers have better possibilities to outperform than elsewhere,” he says.  

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