News 18 April 2017

For Women Only: Profit From The Passive Investment Revolution

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  • Get Ready For The Passive Investment Revolution: Passive Investing is taking the global financial markets by storm and ETFs with their low fees and myriad strategies have made this possible. The world’s biggest money manager Blackrock is moving towards quantitative investment strategies from active stock picking while Warren Buffett has become a champion of passive investing stating that more than $100 billion have been drained into bad investment advice in the past 10 years


  • Morn­ingstar’s Leon Ache­son points out that as $340 bil­lion poured out of ac­tive funds last year man­agers have been shown the door. Across firms, lay­offs have ranged from 2% to 10%


  • Just how pop­u­lar are ex­change-traded funds? Ac­cord­ing to data com­piled by Credit Su­isse, only one of the 15 most heav­ily-traded se­cu­ri­ties on the stock mar­ket in 2016 was ac­tu­ally a stock. All the rest were ETFs


  • To­tal ETF vol­ume in 2016 rose 17% over 2015 and gained 50% over 2014. That com­pared to a 7% rise in trad­ing vol­umes be­tween 2014 and 2016, ac­cord­ing to Credit Su­isse. There are nearly 2,000 ETF listings, an all-time high, Credit Suisse data show


  • Passive investment products like exchange-traded funds have hoovered up assets at a fast clip in recent years. US-listed ETFs saw $283 billion in net inflows during 2016, taking aggregate assets under management to $2.5 trillion, according to Citigroup


  • Exchange-traded funds could gain a further $2 trillion to $3 trillion in assets in the next three to five years, according to a big report on the future of the finance industry from Morgan Stanley and Oliver Wyman


  • With ETFs set to see their share in the US market increase from 15% to 40-60% over the next ten years, according to Credit Suisse, fee compression in the mutual fund industry will likely continue. Morgan Stanley estimates that fees charged by active managers could shrink by more than a third in 2017


  • According to Morgan Stanley and Oliver Wyman, mutual funds are now using ETFs, the very funds that have contributed to price compression, to cut their own costs. By investing in ETFs, mutual funds are able to free up time to focus on “more complex alternative investments,” the report said


  • Here’s Morgan Stanley and Oliver Wyman’s explanation:


  • “Asset allocators such as Outsourced Chief Investment Officers (OCIO) and Wealth Managers will account for a large proportion of this incremental demand as they increasingly use ETFs at near zero cost to source beta exposure, allowing them to focus their resources on high conviction managers or more complex alternative investments. However, looking beyond 2019, the emerging use of passive vehicles as an integral part of an active fund management strategy will be arguably the more significant dynamic. Currently, Mutual Funds have ~$0.5TN invested in ETFs, much of which is used for liquidity management. We estimate using ETFs rather than the traditional approach of holding individual stocks offers a cost advantage of 5-8 bps in large and mid-cap equities. As Asset Managers search for ways to deliver performance at lower costs, this may mean that mutual funds find themselves among the largest investors in ETFs.”
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