It's no secret that exchange traded funds (ETFs) and other kinds of passive index funds have growth enormously in popularity over the past few years.
The reasons behind this trend are hotly debated. It's possible that the 2018 Royal Commission's excoriation of 'big bank' owned wealth manager's like National Australia Bank Ltd (ASX: NAB)'s MLC or Westpac Banking Corp (ASX: WBC)'s BT and their remarkable ability to overcharge customers for underperforming funds has greatly accelerated this trend. All the index fund providers have to do is point to underperformance against an index, point to a high fee and say 'you could do better with us'. It's a compelling argument and one that many people are taking up
But according to a report by the Australian Financial Review, it's the chronic underperformance of 'traditional' active managers like Platinum Asset Management (ASX: PTM) that has been accelerating the shift from active to passive. According to the report, the period over the last twelve to eighteen months has been one of the worse periods of underperformance in the last two decades – with the S&P/ASX200 (ASX: XJO) index being in the top quintile of Australian equity managers. This means that more than 80% of actively managed funds underperformed against the benchmark.
Singling out Platinum, the report notes that only one of Platinum's eight most prominent funds outperformed their index benchmark, with five underperforming by more than 10% – hardly a confidence boost if you have funds under management with Platinum.
In days gone by, the only way to get retail exposure to assets like fixed-interest bonds was through active managers, but ETFs have changed that too. The ease of jumping in the Aussie government bonds market through ETFs has no doubt impacted on active fixed-income managers as well. A similar tale could be told of listed property funds, or even gold and other alternative assets. There's an ETF for everything these days, and its almost always the cheapest option.
However, the market also shows that active managers who can consistently outperform their benchmarks are still wildly popular – I'm thinking of Magellan Financial Group Ltd (ASX: MFG)'s Magellan Global Trust (ASX: MGG) and Wilson Asset Management's WAM Capital Ltd (ASX: WAM).
Foolish takeaway
I believe that the growth of passive investments has been a boon for the 'average' investor. For too long, active managers could get away with charging exorbitant fees for mediocre performance, and I think ETFs are a great way of keeping active managers in check.
