The shift from active to passive
There has been a decided shift in sentiment away from active fund management towards the passive alternative. Active managers engage in quite sophisticated stock and other asset-picking techniques in order to maximise returns. However, this comes at a price which investors are increasingly unwilling to pay – particularly when the additional returns aren’t perceived to justify the additional cost.
Passive managers, on the other hand, simply track indexes or other portfolios and don’t seek to out-perform. The rise in popularity of passive management is evidenced by the growth in exchange traded fund (ETF) investment. ETFs track exchanges or stock index and, according to research firm ETFGI, there is now more than $4.5 trillion (€3.8tr) in global ETF assets, up more than a trillion dollars since the end of 2016.
Outsourcing
The search for increased cost-efficiency and improved value for money for investors is leading many investment managers to outsource just about every activity not seen as part of their core business. This is at least partly driven by increasingly complex regulation of the sector, according to KPMG asset management practice leader Brian Clavin.
“The Mifid II and PRIPPS directives both kicked in at the beginning of January,” he explains. “These are very complex and are driving the outsourcing of as many things as possible to external providers.”
MIFID II is the Markets in Financial Instruments Directive and is designed to offer greater protection for investors and inject more transparency into all asset classes: from equities to fixed income, exchange traded funds and foreign exchange. PRIPPS is the regulation on Packaged Retail and Insurance-Based Investment Products and imposes pre-contractual disclosure requirements for the benefit of retail investors when they are considering the purchase of packaged investment products.
"Fund managers are pushing as much as they can to administrators and this has positive implications for Ireland," says Glavin.
The rise of robo-investing
A number of international firms now specialise in what has become known as robo-investing. This is the use of highly complex and intelligent computer algorithms to pick stocks on investors’ behalf. These firms, including Moneyfarm and Wealthify, ask customers to define their appetite for their risk and the software does the work after that. This has obvious cost and efficiency advantages.
Other companies, like the UK-based Man Group, are using artificial intelligence and other advanced analytics tools to aid in the asset selection process. They are monitoring social media sentiment, consumer reviews, and even satellite imagery to gather additional background on companies and other targets to inform investment decisions.
Impact investing on the increase
The financial bottom line is just one influencing factor for 21st-century investors. The ethical standards of a fund are increasingly being questioned in a trend known as impact investment. Funds that include environmental and other social causes among their performance measures are growing in popularity, particularly among the millennial generation.
Toniic, the global action community for impact investors, recently carried out a worldwide survey among millennials in which 79 per cent of respondents said they were s seeking both financial and social impact returns from their investments. Thirteen per cent said they were interested in opportunities that aligned with their values, regardless of financial return, while just 9 per cent said a financial return was the priority.
Doing it yourself
A particular feature of the funds market in recent years has been the growth in the number of online execution-only investment platforms. These platforms allow people to buy a range of assets including funds, bonds, equities, even currencies, and to manage their own portfolio at a fraction of the cost charged by traditional brokers.
One such platform which has made a strong impact in Ireland is Degiro. The cost advantages it offers are quite striking. For example, an Irish person purchasing €1,000 worth of Bank of Ireland shares on degiro.ie will pay just €2.40 in trading fees as opposed to an average of €49.17 with Irish brokers. That's a saving of 95 per cent. The difference is even more dramatic when it comes to US shares. An Irish person buying €2,000 worth of Apple shares with Degiro would pay just 55 cent in fees as opposed to an average of €74.83 with Irish stockbrokers.
At those prices it’s little wonder that more and more investors are turning to the DIY option.