Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 401

Active funds in Australia land some punches

Like their peers around the world, Australians have enthusiastically embraced passively managed index tracking funds in recent years. Active funds are of course still significantly larger than their passive counterparts making up roughly $2 in every $3 of equity assets under management in this country, about the same as in the UK.

Change happens more slowly than we think

This is simply because net flows of new cash into funds are orders of magnitude smaller than the hundreds of billions of dollars already under management, so change tends to happen rather slowly. What’s more, having steadily lost market share in the past, active funds have recently fought for new investment dollars more successfully here in Australia than they have in in comparable countries.

The Calastone network handles hundreds of millions of fund transactions around the world each year. We have good coverage in Australia, so we get a great overview. It is not our role to say one kind of fund is better than another. This is a job for financial advisers and investors themselves. But we are well positioned to observe the behavioural trends and pick up turning points long before anyone else can, and in real time.

What's happening with fund flows?

First a bit of context. 2020 saw a huge increase in overall transaction volumes across our network globally (+45% compared to 2019). The year started with net outflows from equity funds as the coronavirus infection took hold in China. Investors in Asia were first out of the blocks. Australians and Europeans jumped ship next, selling down heavily in February, while those in the UK took longer to respond.

From April onwards, however, the global policy response to the pandemic prompted investors everywhere to pump cash into equity funds. Australian investors were among the most bullish, adding $6.8 billion to their holdings by the end of the year. Three fifths of this was in November and December alone as vaccine approvals raised hopes for an end to the pandemic. Our index of funds flows for the year scored a very positive 54.9 in Australia compared to those outside Australia of 51.3 (a reading of 50 means inflows equal outflows).

More than a third of the money Australians added to equity funds in 2020 went into funds that only invest in Australian equities. In Europe, the UK, and most of Asia, investors preferred to take a more global approach. While there are good reasons to have a portion of savings in domestic assets, it is surprising to see Australia-only funds take such a big slice of the inflows. Perhaps the successful suppression of the pandemic here in Australia encouraged investors to stay local.

When it comes to active and index funds, investors behave rather like fund managers. Flows into index funds are relatively stable, reflecting a simple ‘buy and hold’ strategy that accumulates savings over time. Net inflows are large by comparison due to total trading volumes – steady buying, not much turnover.

By contrast, investors trade their active funds much more often, picking favoured funds, adding money more opportunistically in response to news flow on economic, political or world events. Investors re-allocate around the world by switching between funds with a particular regional focus or favoured strategy. For active funds, total trading activity is very large, and the resulting net inflow or outflow is extremely small by comparison to overall volumes.

Net fund flows are small relative to huge trading volumes

 

Overseas, index funds are comfortable winners

Outside Australia, index trackers comfortably beat active funds in the race to attract new capital in the last two years. Across Calastone’s global network, index funds garnered inflows of $12.2 billion in 2019 and a further $18.2 billion in 2020. By contrast, active funds saw net outflows of $16.7 billion in 2019 and would have shed cash again in 2020 were it not for a dramatic turnaround in the final quarter. By the end of the year, investors added a net $3.3 billion to their holdings (not enough to make up for 2019 outflows).

Net inflows for index tracking equity funds were US$23.5 billion (A$31 billion) in 2019 and 2020.

Australians still focus on active funds 

In Australia, the preference for passive funds has been less clear in the last couple of years. Australians actually added modestly to their active fund holdings in 2019 and significantly in 2020, in contrast to investors in the rest of the world. Over the two-year period, these inflows totalled A$5.7 billion.

Unlike investors elsewhere, Australians added less to index funds - A$3.6 billion. However, there was relatively little two-way trading associated with the index-fund flows. Activity was characterised by steadier buying while active fund inflows were on the back of volumes four times greater.

The long bull market has favoured passive funds. Savers are happy to ride a rising index and take the simple market return. But passive investors are all-in on market bubbles and market crashes alike. Moreover, the rise of mega-caps like Apple and Amazon has increased absolute risk for passive investors, even if a fund continues to mirror the market perfectly. This is a sort of hidden risk.

Active funds winning in ESG globally

There is one area where the active fund management industry outside Australia is mounting a hugely successful defence against the rise of index trackers – ESG funds. They are the undisputed success story of the last two years. From a near standing start, they have captured investor imagination to such an extent that in 2019 and 2020 they took an astonishing $84 in every net $100 flowing over our network into equity funds of any kind. Net inflows rose seven-fold between 2019 and 2020, even though overall turnover in ESG funds only doubled. Three quarters of this new ESG capital ($16.3 billion) flowed into active funds.

Globally, three quarters of new ESG capital (US$11.3 billion) flowed into active funds. If we strip out ESG funds altogether then traditional active funds have shed US$16.8 billion over last two years.

UK and European investors have been the keenest buyers. Based on fund flows, Australian and Asian investors appear to be about two and three years behind the curve respectively. In 2019 and 2020, Australian investors added just $1.2 billion to ESG equity funds, only $1 for every $13 that flowed into equity funds of any kind – a fraction of the global average.

Appetite is growing, however. November and December saw larger inflows to ESG funds in Australia than in the previous two years combined. Active managers like them because it’s much easier to differentiate their funds from vanilla index trackers. In Australia they are pushing at an open door.

Investors have shown they are still open to buying active funds. Structurally, index funds are likely to take more market share over time, but ESG has given active managers a new string to their bow and a good reason to fight back.

 

Edward Glyn is Head of Global Markets at Calastone. The full report, “Tidal Forces – Can Active Funds Fight the Passive Flows?” can be downloaded here.

 

RELATED ARTICLES

Track if your fund manager is taking the best shot

Five value chains driving the ‘transition winners’

Four reasons ESG investing continues to grow

banner

Most viewed in recent weeks

Lessons when a fund manager of the year is down 25%

Every successful fund manager suffers periods of underperformance, and investors who jump from fund to fund chasing results are likely to do badly. Selecting a manager is a long-term decision but what else?

2022 election survey results: disillusion and disappointment

In almost 1,000 responses, our readers differ in voting intentions versus polling of the general population, but they have little doubt who will win and there is widespread disappointment with our politics.

Welcome to Firstlinks Election Edition 458

At around 10.30pm on Saturday night, Scott Morrison called Anthony Albanese to concede defeat in the 2022 election. As voting continued the next day, it became likely that Labor would reach the magic number of 76 seats to form a majority government.   

  • 19 May 2022

Betting markets as election predictors

Believe it or not, betting agencies are in the business of making money, not predicting outcomes. Is there anything we can learn from the current odds on the election results?

Keep mandatory super pension drawdowns halved

The Transfer Balance Cap limits the tax concessions available in super pension funds, removing the need for large, compulsory drawdowns. Plus there are no requirements to draw money out of an accumulation fund.

Welcome to Firstlinks Edition 455 with weekend update

The resolve of many investors to focus on the long term with their share portfolios is increasingly tested as the list of negatives lengthens. There is a lack of visionary policies during an election campaign and stimulatory spending is contradicting the aims of tighter monetary policy.

  • 28 April 2022

Latest Updates

In praise of our unique democracy and its sausage

For all the shortcomings of our political campaigns, our election process is the best. We are blessed with honest administrators and procedures that we all trust to hand over power peacefully, with a big snag. 

Investment strategies

Is the investing landscape really different this time?

Many market analysts argue that the pandemic has changed everything but we must judge whether the circumstances are as drastic as billed. A quick review of four major events helps decide if this time is different.

Economy

Comparing generations and the nine dimensions of our well-being

Using the nine dimensions of well-being used by the OECD, and dividing Australians into Baby Boomers, Generation Xers or Millennials, it is surprisingly easy to identify the winners and losers for most dimensions.

Retirement

When will I retire? Economic impact of an ageing population

About 39% of the labour force is aged over 45. Intergenerational reports highlight the challenges of an ageing population and the impacts on consumption patterns, dependencies, public finances and economic growth.

The real story behind the crypto crash

The recent sell-off in the crypto market and its trigger - the collapse of the Terra UST coin - has affected many institutions either holding or trading crypto assets, including crypto fund managers.

Investment strategies

Cash is the nightingale, the bird in the hand

The bird in the hand is worth two in the bush, and it's an apt metaphor for investment choices. In 2021, as investors hunted in the bush for decent returns, demand overwhelmed supply. Cash is the bird in the hand.

Strategy

Book review of 'Putin’s People' and his motivation for war

Author Catherine Belton argues Putin’s sole ambition is to hold onto power. Her book seeks to understand why Putin invaded Ukraine after he became isolated and out of touch with reality during the pandemic.

Sponsors

Alliances

© 2022 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.