In emerging market equities, active funds indeed still have the edge over passives: in 2016, active funds captured about two-thirds of the flows into the asset class. Interestingly, active managers also continue to dominate in global equities. The diverse nature of the asset class may play a role here, too.
The beta blues
In fixed income, passive funds are still relative newcomers. Active managers remain dominant across the universe, except in government bonds perhaps. “We have gone almost entirely passive in the investment-grade bond space,” says Bosma. “With yields at this level, it’s very difficult for active managers to prove their worth. We have only one active investment-grade corporate bond fund, the Schroders European Corporate Bond Fund managed by Patrick Vogel.”
But Marta Campello, a fund analyst at the Spanish wealth manager Abante Asesores, prefers to avoid fixed income ETFs because they are essentially a beta investment. “If the perspectives for beta returns get better, it will become more attractive to invest in fixed income ETFs, but that could easily take five to six years,” she says. “Instead, it’s better to be flexible now and delegate risk management to experienced managers.”
Because of the inefficiency of the market, the breadth of issuers and a lack of indices that represent the entire market, index trackers have failed to make serious inroads in higher-yielding credit so far, with the bulk of flows still going to active managers. But that is about to change.
Whereas Bosma is still waiting for a good passive option to appear in the high-yield bond space, he has already found one in emerging market debt. “We have always invested in emerging market debt via active funds, but managers struggle to outperform the index,” he says. “So we bought a local currency tracker recently, and I just found a hard currency ETF. If this product also meets our criteria, we will invest in it.”
Multi-asset: the final frontier?
But there is one bastion that has so far been almost immune to the ETF virus: the multi-asset space.
Multi-asset funds have been responsible for more than half of net inflows into active funds over the past three years. Multi-asset ETFs have been around for years now, but they are not gaining any traction.
There are only a handful of providers of multi-asset ETFs and they share less than €0.5bn in assets between them. Could multi-asset ETFs possibly be the next frontier, or will this space forever remain the domain of active managers?
