Is there evidence of a trend from active to passive invest?

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Is there evidence of a trend from active to passive invest?

Post by Flights of Fancy » 16 Nov 2009 11:10

I keep reading about the rise of ETFs and the pull away from retail mutual funds over the past two years, and suggestions that this demonstrates an increasing appetite on the part of individual investors for passive products versus actively-managed mutual funds.

But is there any actual evidence of a move away from active management to passive management?

If I looked at retail investors and the retail MF market share in, say, 1990, 2000 and 2009 -- would I see a trend emerging as EFTs gain popularity?

Just curious whether anyone has attempted to pull out a trend based on evidence, rather than (IMO) spuriously connecting two data points.

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Post by Shakespeare » 16 Nov 2009 11:16

would I see a trend emerging as EFTs gain popularity?
The problem is that many new ETFs are trading vehicles, not investment vehicles - the 2x products, for example. So they are not being used passively. :roll:
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Post by scomac » 16 Nov 2009 12:27

I don't think that you can conclude anything about investor preference for passive versus active management due to the rise in popularity of ETFs. For the vast majority, they are simply moving to the flavour of the day. Competition for assets is fierce, ETFs represent a "new" alternative to MFs for those that haven't been satisfied with the solutions offered to date. Whether or not the results will be any better remains to be seen. What you can be sure of is that the marketing will make a case that it should be based on highlighted historical experiences.
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Post by Flights of Fancy » 16 Nov 2009 12:42

Thanks for the input. (I agree with you, Scomac, in case that isn't clear from my post.)

I did find this US factbook on mutual funds and ETFs, which does show some trends in net cashflows in and out of mutual funds, index mutual funds, and ETFs.

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Post by Bylo Selhi » 16 Nov 2009 12:56

Another skew on ETF asset sizes are active fund managers who use broad market ETFs to park cash before they can invest it in specific stocks.
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Post by Norbert Schlenker » 17 Nov 2009 14:34

FoF, if you're willing to do some digging, there's a fair bit of historical information back into the mid-to-late 90s for open-ended funds, broken down by asset class, at IFIC.

http://statistics.ific.ca/English/Repor ... istics.asp

If you want to do something simple, like compare asset trends for just Canadian equity funds, then it should be reasonably easy to use the IFIC sheets and plot them against, say, total assets of XIU from annual reports at SEDAR.
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Post by Flights of Fancy » 17 Nov 2009 14:43

(Where've you been, Norbert?)

I ended up synthesizing something from this -- but thanks for the link, I may need yet to go back and do something for Canada.

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Re: Is there evidence of a trend from active to passive inve

Post by Bylo Selhi » 08 Dec 2012 11:33

Flights of Fancy wrote:But is there any actual evidence of a move away from active management to passive management?
To resurrect an old thread, yes, according to this in Fortune: Jack Bogle: Vanguard's $2.2 trillion man
This is the third time I've written about Vanguard in my career at Fortune. The first was in 1991, when the company had around $80 billion under management; then again in 2001, when it had $540 billion; and now, after it has quadrupled in size over the past 11 years.

And no, from Jason Zweig in the WSJ: Are You Brilliant, or Lucky?(*)
Since the beginning of 2009, investors have added $1 trillion more to bond funds than they have withdrawn. Of that, says Morningstar analyst Michael Rawson, $751 billion—fully three-quarters—went into actively managed funds.

But interest rates are at record lows and bonds of all stripes pay similar yields. And most managers are boxed into specific areas of the bond market, limiting their ability to outperform. As a result, most active bond funds don't stand a snowball's chance in Hades of outperforming an index fund that costs one-tenth as much.
But more interesting IMO is this:
Outcomes don't just grab your attention more than process does; they are much easier to measure. So most investors look for top performance first. Only then (if ever) do they ask how it was earned.

Instead, Mr. Mauboussin suggests, investors should turn that thinking upside-down. Start by studying a fund's process, which has three components: analysis, or how the manager assembles the portfolio; behavior, or how the manager responds to the emotional extremes in the market; and organization, or how the business is structured to ensure that investors' interests come first...

Only after a fund or other investment strategy passes these tests should you look at its performance. That is at least as true for bond funds as for stock funds.

And if you aren't willing to spend the time ruling out luck as an explanation for performance, exercise a simple skill of your own: Buy an index fund instead.
(*) if the link doesn't work, Google search on the headline.
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Re: Is there evidence of a trend from active to passive inve

Post by ghariton » 08 Dec 2012 21:10

Bylo Selhi wrote:
And if you aren't willing to spend the time ruling out luck as an explanation for performance, exercise a simple skill of your own: Buy an index fund instead.
Got it.

George

(notwithstanding Mauboussin, how the hell can one rule out luck as an explanation, without repeated trials and observation of results?)
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Re: Is there evidence of a trend from active to passive inve

Post by zinfit » 09 Dec 2012 21:57

Over the past twenty years I migrated from mutual funds to index and ETFs then to my own personally managed accounts were I buy my own stocks and bonds. I am fairly sure that the latter has been much more successful. I wonder if this has been a strong trend ?

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Re: Is there evidence of a trend from active to passive inve

Post by George$ » 22 Mar 2013 07:25

Some good history details - going back to 1971 and earlier by Jack Bogle on "implementation is everything" -
The following will appear in John Bogle’s forthcoming book “The Clash of the Cultures: Investment vs. Speculation,” which John Wiley & Sons will publish in July of this year.

Ideas are a dime a dozen; implementation is everything. I’ve expressed that mantra all through my career, and it surely applied to the creation of the world’s first index mutual fund.

It was way back in 1951 that I first developed at least a vague idea of the index fund. After examining the statistics on equity fund returns relative to various market indexes, I concluded in my Princeton University senior thesis that mutual funds “should make no claim to superiority over the market averages.” Others have interpreted that thought as a precursor of my later interest in matching the market with an index fund. Honestly, I don’t know whether it was or not. Nonetheless, if I had to name the moment when the seed was planted that germinated into my proposal to the Vanguard Board in 1975 that we form the first index mutual fund (based on the S&P 500 Index), that would be it.

By the late 1960s, lots of analysts and academics had begun to seriously pursue the indexing idea. In 1969-1971, Wells Fargo Bank, working from complex mathematical models, developed the principles and techniques leading to its version of index investing. John A. McQuown, William L. Fouse, and James Vertin pioneered the bank’s effort. As McQuown said, “Before we had computers, data, and good models, we didn’t know which procedures were right and which were wrong. We missed a lot, but we did come out with some clear ideas.” Their work led to the construction of a $6 million index account for the pension fund of Samsonite Corporation in 1971.

The idea was solid, but the implementation was (by one description) “a nightmare.” For the strategy was based on an equal-weighted index of New York Stock Exchange equities, creating “cumbersome record-keeping and bean-counting, and requiring day-to-day management.” That strategy failed, and was finally abandoned in 1976, replaced with a market-cap-weighted strategy—now using the market-cap-weighted S&P 500 Index, selected a year earlier as the standard for Vanguard’s new offering—for accounts run by Wells Fargo for its own pension fund and for Illinois Bell.

In 1971, Batterymarch Financial Management of Boston independently decided to offer the idea of index investing to its advisory clients. The developers were Jeremy Grantham and Dean LeBaron, two of the founders of the firm. Grantham described the idea at a Harvard Business School seminar in 1971, but found no takers until 1973. For its efforts, Batterymarch won the “Dubious Achievement Award” from Pensions & Investments magazine in 1972. It was two years later, in December 1974, before the firm finally attracted its first client.

By the time the American National Bank in Chicago created a common trust fund—also modeled on the S&P 500 Index—in 1974 (requiring a minimum investment of $100,000), the idea had begun to spread from academia—and these three firms that were the first professional advocates—to a public forum.

Two other contributors to the development of the index fund concept should also be noted. In 2002, former American Express executive George Miller sent me a note enclosing a copy of a preliminary “red-herring” prospectus filed with the SEC on February 22, 1974, by American Express for “The Index Fund of America.” The fund was “loosely modeled” on the S&P 500, and carried a minimum investment requirement of $1,000,000. But before the year was out, American Express senior management lost heart for the challenge. The offering was withdrawn and the project was abandoned.
In September 2011, The Wall Street Journal published a letter to the editor written by Mr. Miller briefly describing this history, at which point, yet another voice of creation chimed in. An executive of TIAA-CREF reported that way back in 1971, the firm received a letter from Nobel Laureate economist Milton Friedman (who served on the CREF Board) in which he proposed that the CREF variable annuity should eliminate all investment analysis and “adopt a mechanical formula whereby CREF simply bought into a Standard & Poor’s 500 Index.” This idea also fell by the wayside, never to reach fruition
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Re: Is there evidence of a trend from active to passive inve

Post by parvus » 24 Mar 2013 17:18

IFIC no longer makes its data on mutual fund inflows and outflows available, but this is suggestive: "At the end of 2012, there was $15 in mutual funds per $1 dollar in ETFs, down from a ratio of 18:1 in 2011."
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Re: Is there evidence of a trend from active to passive inve

Post by Spidey » 30 Mar 2013 10:13

I've found being about half active half broad-based passive to be a pretty good mix and it seems to have actually smoothed out my portfolio returns. (With the caveat that you have some knack for spotting value regarding the active part.) For example, over the last couple of years my passive half was sputtering and the active part doing quite well. Whereas this year the situation seems reversed.
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Re: Is there evidence of a trend from active to passive invest?

Post by Peculiar_Investor » 14 Feb 2017 08:42

Apparently not Canadians slow to shift to low-cost index investing - The Globe and Mail
Tim Shufelt wrote:While U.S. investors continue to sink enormous sums into passive alternatives, in Canada, the stock pickers still rule the market.

“I think the penetration of indexing in Canada has been really, really disappointing,” said Tom Bradley, president of Steadyhand Investment Funds. “We need to get to a better balance.”
I must admit I fall into both camps. For the Canadian market I'll probably always remain a stock picker personally, although as I help my adult children begin their investing career I'm actively steering them directly to passive investing using simple index portfolios of the couch potato kind. If I could advise my younger self I would expect things would be different.
In the U.S. market, $1.3-trillion (U.S.) has flowed into passive funds in the three years up to last September, while active funds have lost $84-billion over that time.

While the same trend is evident in Canada, indexing has not proven to be even close to the same disruptive force.

Active Canadian funds continue to considerably outdraw passive investments, which account for fewer than 10 per cent of the industry’s assets.
Vanguard has been at the forefront of this move, a recent WSJ article indicates they've recently surpassed $4 trillion in assets,
Vanguard Reaches $4 Trillion for First Time - WSJ (paywall - and workaround).

Unfortunately for Canadians, although Vanguard has come to Canada, Vanguard Canada doesn't seem to have brought the same enthusiasm to the Canadian marketplace, particularly their lack of offering of low-cost index mutual funds.

The Big Banks, with their heavy advertising budgets, overwhelm the messaging in this space, particularly in "RRSP season" where everywhere you look you seem to see advertisements for active investing.
The reason so many Canadian active funds fell short of the index was not for lack of expertise, but rather high fees eroding returns, said Dan Hallett, vice-president of HighView Financial Group.

“The fees charged at the retail level dilute the skill that does exist among professional investment managers,” he said.

One reason Canadian investors may be sticking with higher-cost funds is that they are more willing to pay for advice, Mr. Hallett said. The cost of that advice is typically embedded as trailing commissions on mutual funds, usually adding a full percentage point to mutual-fund management fees.

Those fees, however, provide little incentive for financial advisers to push indexing as a cheaper alternative.
Good points DanH :thumbsup: Somehow the majority of Canadian investors have become comfortable paying 2% or more to have their investments managed. It remains to be seen if CRM2 and more disclosure of these fees and costs will have an impact, particularly in light of the lower returns that have become more common these days.
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Re: Is there evidence of a trend from active to passive invest?

Post by AltaRed » 14 Feb 2017 10:14

Peculiar_Investor wrote:Somehow the majority of Canadian investors have become comfortable paying 2% or more to have their investments managed. It remains to be seen if CRM2 and more disclosure of these fees and costs will have an impact, particularly in light of the lower returns that have become more common these days.
That said, 2016 was a good year and that will suppress the anger somewhat. Imagine if we would have had a year of a negative 10% return performance at the same time.
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Re: Is there evidence of a trend from active to passive invest?

Post by optionable68 » 14 Feb 2017 18:06

There's approx $1.5 Trillion in Investment funds in Canada.

$115 Billion or roughly 8% of that is in ETFs

In the last couple of years, the ETF growth rate has exceeded the Mutual Fund growth rate, but mutual fund net purchases continue to outpace exchange traded fund creations.

From an AUM perspective, in 2016 alone, when you combine mutual fund net purchases and market impact, mutual fund AUM growth in 2016 alone equals the entire ETF industry's AUM.

I suspect when the next bear market hits, the ratio of ETFs to mutual funds will increase
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Re: Is there evidence of a trend from active to passive invest?

Post by DanH » 01 Mar 2017 19:50

Peculiar_Investor wrote:Good points DanH :thumbsup: Somehow the majority of Canadian investors have become comfortable paying 2% or more to have their investments managed. It remains to be seen if CRM2 and more disclosure of these fees and costs will have an impact, particularly in light of the lower returns that have become more common these days.
Thanks PI. (Sorry just seeing this now.) I'm not convinced that CRM2 will have a big immediate effect. But it will eventually have the intended effect I think. The problem is that performance and cost disclosures are piecemeal - i.e. by account. No consolidated reporting required. (FWIW we do both.) And since many firms - like the largest ones - are choosing performance measurement start dates in the recent past we'll get a bit of start date bias given that most performance reports will show bull market environments only.

But in time, people will see pretty mediocre returns - performance that is worse than they expect. And that will put a laser focus on the fee reports and spark questions. I have already noticed people asking more questions lately. Perhaps it's coincidence but I have more people (some prospective clients...some friends/acquaintances) asking for a second opinion on their portfolios. And sadly what I used to see 15-20 years ago in terms of messy, scattered mutual fund/ETF portfolios is still seemingly common today. Sadly I used to see this stuff for portfolios of $100k to $500k. Now I'm seeing it for seven figure accounts with fees ~2.5% and more on average.

But as I noted in another thread earlier today, increased use of ETFs doesn't necessarily equate to greater acceptance of indexing or lower total investor costs. Most ETFs are active bets of some kind. And much of ETF assets is driven by fee-based advisors who typically add 1% (or more) + tax to the underlying product costs. So it all depends on what's behind the numbers. It'd be interesting to see a deeper analysis in the U.S. - where pure indexing is more popular - how much of the "etf flows" are really just going to active funds of one sort or another.

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