Over the years, the perennial debate of the relative benefits of passive versus active management has been raging amongst personal investors, finance professionals, academics and just about anyone with an interest in investing. Although there is no doubt that this discussion will continue for years to come, it has become apparent that each management style has its pros and cons and both can have their own place in an investment portfolio with respect to investor risk, investment horizon and objectives. At BetaShares we certainly believe there is a place for both active and passive management in investors’ portfolios and that is why we have several Active ETFs as part of our product suite.
For those new to the game, or those investors wanting a refresher, here is a brief run down on the differences between passive and active investing. (We’ve also gone into more detail on the different terminology within the exchange traded products sector in this recent article)
Active & Passive: A Refresher
Passive management as it relates to index investing is based on investing in a way that seeks to replicate the performance of an investment index (e.g. the S&P/ASX 200 Index or the S&P 500 Index). Passive fund managers do not have discretion to make specific sector or stock investment decisions, instead, they purely aim to replicate the performance of an index, before any fees or expenses.
In contrast to passive management, active investing typically attempts to beat the relevant market or index the active manager is benchmarked against, or otherwise provide investors with a specific investment objective. Active fund managers reject the efficient market hypothesis and believe that stocks can be mispriced; they have confidence in their abilities to conduct extensive research and analysis and take the view they can outperform the sharemarket over time or otherwise provide an investment objective difficult to achieve via passive investment. Hence, these managers actively pick investments from across the market, depending on the objectives of the fund, where they see mispriced securities.
The launch of Passive Funds
1975 saw the first passive fund being launched and since then the industry has seen significant traction, especially within the last 15 years. To date, the vast majority of global exchange traded products use a passive investment approach, and Australia is no exception. With 228 exchange traded products on the ASX and the industry recently hitting $36.6 billion (as at 31 March 2018) in total funds under management, the segment offers a wide range of investment solutions that are continuing to innovate and modernise index ETFs.
Australian ETP Market Cap: July 2004 – March 2018 (A$m)
Source: ASX, BetaShares
For those investors rejecting the efficient market hypothesis, or simply those that want to diversify or are looking to generate outperformance from their portfolio, it has traditionally been cumbersome to gain access to highly regarded active fund managers; with relatively high fees, limited capacity, wide spreads, platform fees, application/redemption forms and high minimum investments being some of the drawbacks that investors may variously come up against when allocating to an unlisted fund.
Enter Active ETFs…..
Active ETFs are actively managed funds that aim to outperform the market or a particular pre-set benchmark, or otherwise provide an actively managed investment objective. The combination of active management and an exchange traded fund provides investors with an innovative solution to asset management, with many key benefits including:
- Ease of access (traded on the ASX just like any ETF or share)
- No paperwork to buy/sell, once a broking account has been established
- Intra-day liquidity
- No minimums (beyond those levied by a broker which is typically $500)
- Transparency via intra-day pricing
- Access to top rated fund managers
Given the above, Active ETFs present certain advantages over more traditional unlisted funds. Because of this, the industry has seen (and can expect many more) top fund managers launching Active ETFs. An example of this is the partnership between BetaShares and Legg Mason to launch the BetaShares Legg Mason Equity Income Fund (managed fund) and the BetaShares Legg Mason Real Income Fund (managed fund). Both of these funds replicate the established unlisted versions of these Legg Mason Funds, with the added benefit of being in an exchange traded structure.