Sometimes it is quite fun to observe the European fund industry, especially pertaining to the active-versus-passive discussion. One of these fun topics is the fact that the more market share ETFs gain from net inflows, the more active managers start to talk about the risks of investing in an ETF. They argue that these products are always fully invested in their respective indices and have no active component that will protect investors against losses under rough market conditions.
Why do I find this funny? Firstly, I would assume an investor who is buying an ETF knows there is no active component included in these products; i.e., the ETF replicates the return of its underlying market in all circumstances. This means the investor has made a decision against actively managed funds and should therefore know what is needed to make asset allocation calls in times of market turmoil. But, I also know that this is not always the case, especially for retail investors. Secondly, market statistics show that active managers didn’t learn their lessons from the bursting of the “tech bubble,” since their relative returns were even worse during the financial crisis. In these periods the average actively managed fund did not help the investor avoid losses compared to the market.
Last but not least, I find this funny because it seems these discussions are raised to distract investors from passive investments by scaring them, instead of by convincing them that actively managed products are the better choice. From my point of view some active managers want to maintain their positions without taking seriously the concerns of investors about the pricing and transparency of some actively managed funds; i.e., they don’t want to change their existing models to satisfy the concerns of investors. That would mean their revenues could go down, and they would become more vulnerable in discussions with investors. Increased transparency would shed light on the risk positions they hold in their portfolios and would enable investors to question these positions.
For me it is clear that some active fund managers are scared by the success of the European ETF industry over the last 18 years. ETFs have changed the world for asset managers, since investors now have cheap and transparent alternatives for implementing their asset allocation views. As a consequence, a fund’s average results are no longer good enough to gather assets under management, and high management fees—even for above-average results—do not help either. This means active managers must adapt their business models to this brave new world in order to claim their market share. I really hope they do, since an all-passive world wouldn’t be good either. I am fairly sure they will do so, since the fund industry is a very innovative place and the most progressive asset management companies are already on their way to adapting their business models to the new requirements of investors.
Detlef Glow is head of EMEA Research at Refinitiv