Question

Examine the growth of passive investing over the past twenty years, particularly in contrast to active investing, and identify possible reasons for this pattern. You should consider researching the size of assets under management, fund flows to active and passive investing, and the relative performance of active and passive investments

Answer 1

Market share for passively managed funds has risen to 45 percent, up a full point from June 2018, according to data this week from Bank of America Merrill Lynch. That continues a trend over the past decade in which investors have moved to indexing, particularly through exchange-traded funds. Passive fund assets have expanded rapidly over recent years and now represent a significant portion of the global investment fund universe. Measuring industry size by assets under management, passive funds managed about $8 trillion or 20% of aggregate investment fund assets as of June 2017, up from 8% a decade earlier. Passive (or index) mutual funds, the traditional passive portfolio product, grew sharply over this period. ETFs, which allow intraday trading of shares in passive portfolios on a secondary market, grew even faster 3 ETFs’ share of passive fund assets exceeded 40% in June 2017, compared with around 30% IN 2017.

Across countries, passive funds have gained most prominence in US equities. There, they have expanded to more than $4 trillion, or 43% of total US equity fund assets. Although starting from a much lower base, passive funds have gained even more traction among Japanese equity funds, supported by the Bank of Japan’s ETF purchases and the Government Pension Investment Fund’s increased allocation towards equities over recent years.4 Sharp rises in the proportion of passive funds have also occurred for European and emerging market economy (EME) equity funds.

Various factors have contributed to the growing investor preference for passive funds in recent years. A key one has been the better performance record of passive funds over actively managed funds.The recent popularity of lower-cost passive funds has been supported by structural shifts in the financial advisory industry. These include: the rise of the socalled “robo advisors” (platforms offering low-fee automated investment management services); the introduction of fiduciary duty requirements; and a move away from commission-based remuneration. Regulators’ greater focus on fee transparency has also played a role in some jurisdictions.