The rise of passive funds

Passive funds are the flavour of the day, applying pressure on their active peers, often outperforming them at much lower cost. But the situation, as experts at FundForum Asia pointed out, is not straightforward. So what was discussed?

Antony John, principal at Ilex Associates, acknowledged that the last decade has seen the trialling of an unparalleled Central Bank monetary policy – namely quantitative easing – which has completely repriced alpha and beta. As such, any reversion of this policy could see a return in popularity of alpha-focused managers, who protect investors against downside risk.

There has been huge fee compression in the passive space. Equally, smart beta, which include some exchange traded funds (ETFs) is also seeing positive flows. Panellists highlighted smart beta strategies still charged quite sizeable premiums, and predicted that as this asset class attains scale, prices will collapse.

The growth of artificial intelligence (AI) in the industry does alarm asset managers who fear their livelihoods being expunged. Panellists at FundForum Asia provided some reassurance, and warnings about incorporating AI.

“Human inconsistency is the driver behind diverse decision-making, which ultimately saves the market,” said Bryan Goh, CIO at Bordier & Cie in Singapore. However, AI lacks this trait and is highly systematic. There is a strong risk AI would simply pile into the same trades leading to widespread crowding. As such, many believe AI’s influence may not be as significant as its proponents expect.