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Passive funds leave active in the dust

Investors behaving like fund managers by trading active funds opportunistically and ‘buying and holding’ index trackers


Harriet Habergham

Passive funds attracted $23.5bn of new client money over the last two years, while their active counterparts were hammered by $5.4bn of redemptions.

Calastone’s global investor report shows that index trackers attracted inflows of $10bn in 2019 and $13.5bn in 2020 across its network.

In contrast, active funds saw net outflows of $11.4bn in 2019, and would have haemorrghaged cash again in 2020 if not for the dramatic turnaround in markets in the final quarter following the flurry of vaccine news. By the end of the year active funds managed to scrape together $6bn.

The report found that “fund investors behave like fund managers”. Active funds are traded much more frequently with investors “adding money more opportunistically” on the back of positive and negative newsflow. Meanwhile investors are “buying and holding” index funds regardless of the economic backdrop, resulting in flows that are consistent and “relatively stable”.

Fixed income and global equity buck the trend

One area where active funds have the upper hand is fixed income. Flows into active bond funds have totalled $36.7bn for the last two years compared to $11.8bn for their passive counterparts.

Asian investors in particular favour active fixed income funds, but those in Australia and Europe have also added significantly more to active funds than index trackers, Calastone noted.

Global equities is another area where active funds have successfully fought off competition from index funds.

Global funds have remained among the most popular equity strategies among investors, taking in $24.6bn of new cash in the last two years while equity funds have taken in inflows of $18.1bn. The vast majority of money coming in has gone to active funds which took in a net $17.4bn, two-and-a-half times more than the $7.2bn brought in by passives.

Across Calastone’s global network only European investors favoured passive global funds.

UK investors shun domestic active funds

On the other end of the spectrum European equities have borne the brunt of the equities sell-off, losing $6bn over two years as investors all over the world reduced their exposure to the region.

European equity sell orders have been 1.5x greater than buys over the last two years while their passive counterparts saw modest net inflows, particularly in 2020.

The UK has also proved unpopular for active funds over the last two years, Calastone noted, as Brexit, Covid-19 and a stock market dominated by low growth value stocks have turned global investors off to the region.

Even UK-based investors shunned active funds targeting their home market over the period, preferring index trackers, the report said.

ESG accounts for 84% of equity fund investments since 2019

ESG has propped up active funds as the tide turns towards passive, accounting for 84% of investments into equity funds over the past two years. ESG funds are driving active inflows, without which traditional active funds would have shed $16.8bn over the last two years.

Sustainable investments have risen seven-fold between 2019 and 2020, reaching $15.1bn inflows. The last four months of 2020 saw greater inflows than the rest of 2020 and all of 2019 combined.

UK and European investors have been the keenest buyers, with European investors selling $7.5bn non-ESG funds and buying up $4.3bn ESG alternatives over the last two years. The UK have bought into the trend the most, as ESG buys were almost four times greater than sells in 2020.

Meanwhile, Australia is lagging behind as restricted information and a home-market bias leaves Australian investors with fewer ESG options and Asian investors have shown no interest in the market at all, the report finds.

While active ESG funds are paving the way, passive ESG funds are growing too but questions remain over fees and whether tracking an external ESG benchmark is rigorous enough for investors.

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