One way or another, the oft-derided retail investor is becoming a big player in global markets.
As of 2012, open-ended funds across the globe held $26trn (£21.3trn) in assets under management (AUM), equivalent to 11 per cent of global assets. This figure continues to be cited despite being a little out of date; there is little risk in suggesting that the proportion has continued to rise sharply since then. In 2015, the International Monetary Fund put its estimate of asset management’s share of global AUM at 40 per cent – though this includes monies held in other fund structures. Central to this rise are retail investors of all stripes.
This isn’t just about self-directed investors; more accurately, it’s a story of strength in numbers. On the domestic front the impact of a greater number of retail investors pooling together has already been observed in the discretionary fund manager (DFM) world. On a global, corporate scale, it’s via passive providers that investors are starting to take increasingly large stakes in companies. (A brief tale of two economies: In Japan, it’s the central bank whose indiscriminate investment has caused it to rise up the shareholder registers. In the US, it’s Vanguard).
Inevitably, these new trends bring with them new concerns. In the UK, those worries appeared to play out last summer via a string of property fund suspensions. As I wrote last year, I suspect the most skittish investors weren’t the traditional retail advisers of old, but the DFMs whose USP is tactical asset allocation.
In the case of passive providers, the issues tend to centre around market structure: how exchange-traded funds are affecting trading patterns in the US, what effect end-of-day passive rebalancings have on index levels, and how providers can provide good governance when the threat of selling out is removed.
So like it or not, retail investors, en masse, are now a larger force in markets than they have been for some time.
If a change to this state of affairs does occur, it may be due to a shift in definitions rather than an end to these trends. The concept of the ‘retail investor’ has always been a nebulous one, and – as Investment Adviser reported last month – things could yet become even more confusing. The term encompasses self-directed investors, those who use an adviser, those whose money is run by a DFM, and sometimes high-net-worth individual investors, too.
In a discussion paper on open-ended funds investing in illiquid assets, the FCA has floated the idea of categorising the assets of professional investors, including DFMs, separately from those who are self-directed.
But it’s far from certain that this idea will be pursued – it’s a more radical move than the regulator may suspect. Either way, the era of the retail investor isn’t going away any time soon.