Over US$2.5tn has been switched from actively-managed to index-tracking funds. What does this mean for providers?
The trillion-dollar switch
When I first saw this chart from the ICI Factbook in 2015, charting the cumulative switch from active funds to index funds, I called it the “trillion-dollar switch”.
I reinforced my call – first made to active managers in 2012 in this article for CFA Magazine – to decide whether they wanted to be component manufacturers and face commoditisation, or multi-asset solutions providers.
Almost 10 years on and the chart has extended the same trends – and it’s now the US$2.5 trillion-dollar switch! [1]
And in the time the shift to multi-asset solutions in the UK adviser market has been most pronounced in the adoption of Custom Portfolios by advisers upgrading their MPS proposition.
Passive investing and index investing are different
It is important to note that the rise of index investing is not about passive. In our view, there is no such thing as passive. Indices are no longer just traditional, passive or market cap weighted.
Indices can be equal-weighted, dividend-weighted, factor-tilted, factor-isolated and sector-focused. Index investing means using indices to design in or design out specific biases. Each of these indices requires active choices in its design and methodology. Furthermore, selecting an index exposure to implement within a portfolio requires an active choice. So the rise of index investing is not the rise of passive. It’s the rise of efficiency.
ETF does not mean passive
The original actively-managed exchange-traded fund is the Investment Trust (in closed-end form) launched in the UK in 1868. The first open-ended ETF in its modern incarnation was in 1990. Since then, ETFs have been near-synonymous with index investing. But ETFs are a fund format, not an investment strategy. The recent rise of actively-managed ETFs help reinforce that distinction.
From a UK perspective
We are delighted to have seen some of the UK fund houses embrace this structural rise of index investing (sometimes alongside an active offering). Firms like HSBC Asset Management, Legal & General Investment Management (LGIM) and even Aberdeen. Their efforts in backing this structural trend have been rewarded.
Unfortunately, some UK fund houses treat the active v index debate more as one of religion, rather than reason. The reality is there is room for both active and index-tracking investment styles. In fact, they need each other to function well. So there’s nothing wrong with offering both.
Conclusion
We welcome future innovation in the index investing space and in the efficiency of the ETF format. It’s up to fund providers to rise to that challenge.
[1] https://www.ici.org/system/files/2024-05/2024-factbook.pdf
