Assets managed through global index funds pushed through the $10 trillion barrier at the end of 2019, shortly before the pandemic told hold. This represents a more-than-fourfold increase in index-based AuM over the past decade, according to data from the US-based Investment Company Institute.
More than 70% of respondents say that the market for passive investment will continue to grow, including 10% who say it will grow strongly. Only 11% believe the market for ‘passives’ will contract (fig 12).
Predictably, the low relative cost of passive investment was important in explaining the response (fig 13). This view (39%) predominated over those who thought investment flows into passive instruments will contract owing to greater pressure from actively managed products or cash (24%) – or 18% who say that demand will remain unchanged.
Respondents believe that investment in passive products will predominantly be in equity-based index funds or ETFs (fig 14), particularly US equities (60%), UK equities (44%), European equities (40%), global equities (39%) and Japanese equities (32%).
Appetite for Chinese equities via passive products is currently low in relative terms – partly as a result of economic and political uncertainties linked to the pandemic, the impact of US-China trade tensions and the new Hong Kong security law. However, China-based investors in collective investments have typically exhibited a preference for actively managed fund products, alongside significant holdings of money market funds, with ‘passive’ products accounting for a smaller percentage of asset allocation in relative terms.
This said, with China becoming the fifth-largest global fund domicile according to Efama data – recently surpassing the UK and France to account for 4.1% of global fund assets – the Chinese market offers growth potential for a wide range of active and passive fund products and ETFs.
Demand for passive fixed-income products is lower than that for passive equities, but nonetheless significant. Developed market fixed income (24%) and emerging market fixed income (21%) were the most popular choices via a passive investment route.
The survey finds that active management will grow to meet the demands of the current investment environment. Some 45% say that active management will continue to grow – although there is some polarisation of opinion, with 30% saying that active management will contract.
On balance, the survey predicts that current financial conditions will provide a boost for active management. For equities strategies, respondents indicate that judicious stock-picking will be particularly important in this period of high market volatility (52%, fig 15). However, fixed income investors may also look to active managers that can to respond quickly to market opportunities and avoid riskier areas of the market.
This substantially outweighs the number who believe investors will avoid active products owing to their higher cost (16%) or the risk posed by volatility in the market (13%).
Reflecting on where active management will provide most fertile opportunities (fig 16), respondents point to emerging market equities (61%) and mid- or small-cap investments (57%). They also highlight openings in Chinese equities (49%) and emerging market fixed income investments (44%).
Returning to themes discussed earlier, respondents believe that active management will be key in providing exposure to private markets – providing specialist expertise in real estate, private equity, infrastructure and private credit and to multi-asset strategies.
To evaluate these investment options, we asked respondents to rank their outlook from ‘very positive’ (5) to ‘very negative’ (1) and calculated a weighted-arithmetic mean for each market in this list. A higher weighted-arithmetic mean indicates a more positive investment outlook for the asset class.
In the private markets area (fig 17), the survey identifies strongest openings currently in infrastructure (weighted arithmetic mean = 3.53), private credit (3.29) and private equity (3.26).
Real estate (weighted arithmetic mean = 2.70), commodities (2.80) and hedge fund strategies (3.00) were found to offer the weakest opportunities in this list in the current investment climate.
Emerging market equities
In the emerging market equities sector, respondents highlight Asia (including China, India and South Korea) as offering the strongest growth potential from a list of eight investment options – Asia (including China, India and South Korea), Asia (ex China, India, South Korea), Latin America, China, South Korea, India, the Middle East and North Africa (MENA) and South Africa.
Through this process, respondents identified the strongest opportunities (fig 18) through regional investment in Asia (including China, India and South Korea) – with a weighted mean of 3.69. Looking beyond regional allocations, respondents identify potential for strong equities returns in China (weighted mean = 3.46) and South Korea (3.45). India ranked in mid-table with a weighted-arithmetic mean of 3.16.
Currently, there is limited appetite for equities investment in South Africa (weighted mean = 2.44), Latin America (2.48) or the Middle East and North Africa region (MENA, 2.55), which ranked at the bottom of this list of investment options on the basis of their weighted-mean scores.
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