Covid-19 volatility underlines passive investing’s appeal
Asset owners in Asia will likely have to review their investing priorities, given the pronounced recent market shocks courtesy of the coronavirus pandemic. The collapse in market valuations is likely to underpin the importance of passive investments in their investment portfolios.
The speed of stock falls across the world in recent weeks would pose a challenge for any investment fund. Over the past month the S&P 500 has dropped about 25% and the FTSE 100 by 32%. But active managers like to boast that it's amid periods of volatility that they can espy opportunities, or at least avoid the worst areas of investment.
Despite statistics indicating that active funds underperform over long periods, institutional and retail investors alike will be keen to see whether these funds could show their mettle in falling markets.
Jeffrey Ptak of fund research provider Morningstar analysed exactly that: had the recent bear market helped active funds? His conclusion? No.
According to Morningstar statistics, about 52% of US active equity funds beat their benchmarks between February 20 and March 12, while 42% of all active funds did so. That period didn’t include the most recent calamitous drops. Net of fees, many more of those active funds would have done worse than index alternatives. The former typically charge fees anywhere between 20 and 100 basis points and the latter usually well under 10.
For asset owners that use passive investing extensively, such as New Zealand Super (NZ Super), this is no big surprise. David Iverson, head of asset allocation for NZ Super, said the NZ$47 billion ($30 billion) sovereign wealth fund was very clear-eyed about how difficult it was for active funds to outperform.
“We don’t have a great focus on active managers as a source of return,” he told AsianInvestor in early March. “In our investment beliefs, we think true skill is reasonably rare. It’s hard to identify and consistently track returns from skill-based sources.”
NZ Super places about two-thirds of its assets in a passive-reference portfolio, which tracks a combination of equities and bonds. It’s reviewing its allocation by June, but it expects to tinker with its distribution, not conduct a wholesale re-think of passive investing.
ETF REALLOCATIONS
Thailand’s Government Pension Fund (GPF) also uses passive investments, particularly exchange-traded funds (ETFs). Speaking to AsianInvestor in late February, when markets were listing but not yet sinking, Man Juttijudata, assistant secretary of the risk management group, explained the pension fund doesn't aim to do too much alpha-seeking outside the country’s borders.
“We skip the alpha from stock picking, and we have to compensate that with a macro top-down for allocation,” he told AsianInvestor.
“For global mandates that we do not have resources to cover the bottom up at the micro level, we hire external fund managers. But we are starting to manage top-down allocations at the macro level partially by ourselves.”
He added that the team uses different types of ETFs depending on the region and its macroeconomic outlook; for its short-to-medium term investing strategy it particularly focuses on factor-based ETFs and sub-regional ETFs. This allows it to tilt towards different investing style based on the economic cycle.
This could prove particularly helpful in the coming months, once markets stabilise and begin to recover. At that time GPF would tend to tilt more towards momentum and growth factor styles, said Man.
ACTIVE OPPORTUNITY
If there’s any silver lining to be found in the current murk for active fund managers, it’s that some investors believe the current turmoil could offer asset-picking opportunities.
Jang Dong-hun, chief investment officer of the Public Officials Benefit Association (POBA) told AsianInvestor his W13.9 trillion ($11.7 billion – as end-November) fund mostly uses passive investments for offshore equities, but would potentially trim some of this and allocate towards active investing as price-to-value dislocations became clear.
One particular area of interest? Real estate investment trusts. Poba likes real estate, given its long-term, broadly predictable and quite appetising returns, and Reits offer it a more liquid way to get exposure to it.
“As you are aware, Reits were hammered in accordance with the public equity markets. We will try to take advantage of market movements to increase our position in Reits,” Jang told AsianInvestor in mid-March.
The interest of Poba is likely to be replicated by others. For all the disappointment of active fund performance, they have an opportunity to grasp new business from growing asset owners who want to allocate new money following the biggest market dislocation in 30 years.
But for most of their existing public market investments? Passive should do quite nicely, thank-you.
Jaycee Man and Richard Newell contributed to this article.
Look out for our the cover story of AsianInvestor’s Spring 2020 edition, which focuses on how asset owners could evolve their use of passive investing in the future.