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Coronavirus chaos could cause shift away from passives

Coronavirus chaos could cause shift away from passives

The current chaos in global equity markets could lead to investor sentiment shifting away from passive investments, according to Gary Potter, who jointly runs the multi-manager investment team at BMO Asset Management.

Mr Potter uses both passive and active funds in the products he runs.

He told FTAdviser the prolonged period of strong performance of equity markets in recent years meant that investors made the “logical” decision to go into passive funds, as they could capture the gains made by the market in a low cost way.

But he said: “Turbulence like we are seeing now is when active managers show their worth. It is a time when the cost argument becomes less relevant because the active manager can perform better than the passive by more than the difference in charges.

"The market falls happening right now are because the market cannot price what it doesn’t know, this is a crisis that is different and meaningful, but we will come through it.

"The time to buy passives is when a market is low, and the time to buy active is when a market is high, and that’s not what has been happening in recent years, when the market has been rising people have been buying passives.

"I think this crisis will really change people’s perception of passives. There are actually some active funds, such as those run by Crispin Odey, that are doing well right now.” 

Data from Morningstar shows the introduction of the Mifid rules at the start of 2018 coincided with a material rise in the popularity of passive funds relative to actives.

The Mifid rules provided clients with greater disclosure as to the trust cost of ownership of a fund. 

Paul Gibson, an adviser at Granite Financial Planning in Aberdeen, uses only passive investment products for clients.

He said: “In severe market downturns such as we are currently experiencing all funds passive or active fall. I don’t think active will perform any better in a bear market this time round.

"Their track record in previous bear markets is not good so I don’t expect any difference this time. I don’t think sentiment towards passives will necessarily suffer although some investors will be put off investing completely.”

david.thorpe@ft.com