Dubai: Due to underperformance of some of funds managed by the asset managers after a volatile phase, there has been growing concern on the heavy fees paid by investors, with experts advocating the passive fund route.
In 2014 alone, global assets under management (AUM) reached pre-crisis level, registering a growth of 8 per cent to stand at $74 trillion (Dh271.8 trillion), but witnessing a growing shift to passive funds, the Boston Consulting Group said in a report.
The AUM of traditional active products represented 39 per cent of AUM at the end of 2014, compared to 59 per cent in 2003, while alternatives grew from 6 per cent to 11 per cent, passive products from 8 per cent to 14 per cent, solutions from 6 per cent to 13 per cent, and specialities from 21 per cent to 24 per cent.
This signified investors’ persistent hunt for more outcome-oriented products, greater portfolio diversification and less-expensive products in core categories.
“Assets allocated to passive strategies were more than double compared to active strategies. The asset allocation of institutional investors and asset managers can see over trillion of dollars in passive strategies,” Gaetan Delculee, head of Exchange Traded Funds (ETF), Indexing & Smart Beta Sales France & Luxembourg at Amundi told Gulf News on his recent visit to Dubai.
“The question is where I’m going to use passive and where I’m going to use active. These are much more performing than active strategies. A lot of institutional investors and asset managers have decided to go for passive funds because it is difficult to generate alpha in active strategies,” Delculee said.
Expense ratio
The total expense ratio of an active fund could be as high as 2 per cent per annum, compared to a minuscule 0.06 per cent per year.
According to the BCG, the fees on an active fund fell by 4 per cent in 2014, compared to a 20 per cent fall for passive funds.
“In our view, most investors would benefit from choosing passive [index] funds instead of active funds. This is not so much because of the low-yield environment. The data shows that this has been the case in most markets for a very long time,” Sam Instone, chief executive officer of AES International, told Gulf News.
“The truth is that it is really hard for any manager, in most environments, to deliver performance that justifies their fee insights on fund management and the money involved,” Instone said.
Patrick Odier, a senior partner with Lombard Odier, concurred.
“There has been trend of a shift from active to passive fund management for cost reasons. Investors have been trying to reduce the cost of managing the portfolios by getting into indexed funds,” Odier said.
Unfortunate
Even on the home market, government-run asset management firm is not very impressed with active fund managers.
The entry and the exit load has been a vital point of discussion among investors who intend to invest.
According to Mohammad Qasim Al Ali, CEO of National Bonds, other mutual fund companies tend to charge clients on the higher side regardless of the fund’s performance.
“Unfortunately the financial market is not very customer-centric. They think how to benefit themselves first through interest fees, exit fees. So by the time the fund reaches its maturity, the investor hardly get any benefit,” said Al Ali.
“If fund managers are confident about their performance and skills, they should lower their fees. It’s an ethical issue of whom do we look after first, do we look ourselves first or fund managers, or look after the bond holders,” he added.
National Bonds has a 1 per cent subscription fee, which is waived off if the client stays with them for six months. It levies a 2 per cent fee on credit cards, but waives that fee for clients who are more than two years old.
Instone feels “we are evangelists for the power of the markets over the long term. Like Warren Buffett, we think that the markets will tend to reward investors who are patient, cost-sensitive and can hold their nerve. Overwhelmingly, we approve of passive investments that, when linked in a coherent and robust asset allocation, can predictably help investors to achieve their objectives.”
