Investing

Investors are fed up with paying high commissions for low returns and have decided to take action

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Investors have already communicated to the industry what their verdict is: index funds and ETFs are the way forward. And the trend is accelerating. Active management continued to lose assets in 2016 (-$204 billion dollars). This is higher than the decline suffered by this type of product a year earlier (-$135 billion).

In contrast, ETFs and indexed products increased by $500 billion. This  is data from the Morningstar Global Flows Report for 2016, which show that the gap between the outflows of active management strategies and the takeovers of passive products in 2016 has never been so wide. This means that 42% of the assets in equities are in passive management funds. By comparison, in Europe, that percentage is 25%.

It is curious because, in 2010, both regions started from similar passive management acceptance levels (around 15% of the assets on both sides of the Atlantic were in ETFs and indexed funds), although from that year the trend of uninterrupted growth of passive management accelerated in the United States, being much slower in Europe.

Much of this has to do with cost, although it is not just a matter of betting on passive management simply because it is cheaper. This is evidenced by the fact that some active management entities have been able to succeed in this environment of strong interest in indexing. “These are managers who have been able to deliver high returns at a reasonable cost,” said Alina Lamy and Timothy Srauts, members of the Morningstar Quantitative Analysis team.

 

To prove their claim, both use the example of Vanguard, which owns 23% of the net assets managed by the industry in the United States, and that last year captured an average of $1.1 billion dollars a day.  “Vanguard is a company well-known for being a pioneer in the marketing of indexed products, which have received very remarkable flows, but the interesting thing is that its actively managed funds are also attracting very considerable volumes of money. This illustrates that this is not a battle between active and passive management, but about offering consistent returns at a low cost.

Tired of paying high commissions for low yields, investors have been selling the more expensive funds and buying cheaper ones, which has been forcing active managers to lower their rates.

Investors have become more aware of how the costs involved in investing in a fund can eat the long-term returns. Highly respected investors such as Warren Buffett or Stuart E. Lucas, regarded as one of the top global experts in strategic management of large private estates, have had a very clear influence. “The most important trend that is taking place in the world is cost control. In a scenario of low returns, costs become more important.” Like Buffett, Lucas is committed to channeling investment through cheaper products that offer, in turn, a wide diversification.

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