George Soros once said: “I look at financial markets as a branch of history.”
Whether or not you are a follower of Soros, reassessing a market periodically is a useful exercise. Indeed, the FCA has launched a Retail Distribution Review (RDR) review – two years after implementation.
In the outsourcing column in December last year, we highlighted some of the more common outsourcing solutions that are available to the financial adviser and their clients. Specifically, we described the differences and similarities between managed portfolio solutions and multi-asset funds.
As these solutions are still available and are still being recommended by advisers, we want to explore here whether there have been any changes or have enhancements been made. We will also cover a few market updates, trends and developments during the past year.
Headline trends: Active versus passive
Over the course of the year, the trend of passive funds – be they index trackers or exchange-traded funds – being used in solutions has continued to increase. IMA figures approximate around 10 per cent of retail funds sold.
Perhaps the greater availability of ETFs on adviser platforms has accounted for this continued rise in usage. Also ‘smart beta’ funds, or probably a better description is ‘enhanced index’ funds, have started to gain some traction. These funds implement a passive investment strategy, but rather than follow traditional indices, they track elements of an active investment strategy.
For example, whereas a traditional passive fund will track the S&P 500 index as closely as possible, an enhanced index fund may track an index comprised of companies with low price/earnings, high dividend yield or some other metric.
The aim of enhanced index funds is therefore to offer an active level of performance, while keeping the investment cost similar to a traditional passive fund (and lower than active peers).
Existing passive funds have gained further inflows over the past year. Post-RDR, advisers’ interests now follow more closely those of their clients, hence a renewed focus on returns’ net of fees.
Year-to-date, roughly 80 per cent of active large-cap fund managers have underperformed their benchmark, so, while this is a short-term sample, it’s likely that this inflow will continue in 2015.
Proponents of passive investing point to the doyen of active investing and the Ben Graham value investing acolyte, Warren Buffet, has now also backed the passive investing strategy.
Mid-way through the year, he cheerfully revealed that he would recommend Mrs Buffet invests her inherited assets in a S&P 500 tracker, after his death. Presumably because he believes that no active manager could replace him or that active management is not for retail investors.
Buffet did famously make a bet in 2008 that an index fund would beat a fund-of-hedge-funds over a 10-year period. (And with only four years remaining on the bet, the S&P 500 tracker is up 44 per cent against 12.5 per cent for the hedge fund of funds.)