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OPINION

Passives are part of the solution

Passives are part of the solution
June 11, 2020
Passives are part of the solution

Many of these have never been tested by a severe market downturn. Now they have. All a passive fund can do when the market it’s tracking crashes is fall with it, which is enough to send many people running for the exit. Plenty of active funds follow markets downwards too, but in March close to E22bn flowed out of European and UK ETFs, and in April investors in the UK put almost twice as much money into active funds as they did into traditional trackers, reflecting the view that in volatile markets active managers should be better placed to protect their money and deliver gains.

And volatile markets and tough times ahead are what many people expect. The recovery was fast, but can it last given the carnage caused by coronavirus? The abnormal levels of support required by the market – hundreds of billions in QE, tens of billions in Bank of England pandemic loans, billions in equity raisings on top of the hundreds of billions of debt carried by plcs (all in the UK alone) – underline just how far we are from 'normal' conditions.

If things get really tough and earnings remain under pressure, tsurely active funds with managers who can use judgment to select high-quality companies look like the smart choice.

But don’t dismiss passives. Those levels of support are exactly why the bulls are leading the charge – Simon Thompson (p14) and Michael Taylor (p17) included. Plus nothing has changed in terms of what ETFs offer: ultra low charges, transparency and ridiculously easy access to a myriad of markets and sectors. With them investors can build diversified, globally and thematically exposed portfolios. That makes them part of the solution, not the problem. Some thematic ETFs have been performing exceptionally well: WisdomTree Cloud Computing was up 34 per cent between the start of the year and mid May against a fall of 12 per cent by the MSCI World Index. And thematic ETFs aren’t the only variety, there are smart beta ones too, and a brand-new arrival in the form of actively managed non-transparent ETFs – these are similar to actively managed funds but their charges are lower, and their aim is to steal even more market share.

If your strategy has been to include passive elements in your investing, the current crisis is certainly not a reason to deviate from that. Timing the markets is impossible, and spotting winners is tricky. In the dotcom boom and bust, Amazon’s share price fell from around $107 to $5 (today it’s above $2,600. Not every active fund manager would have held on, but every Nasdaq tracker would. Even today Vanguard is one of the company’s biggest shareholders.

Star active manager Terry Smith once said words to the effect that the impossibility of knowing what lay ahead was the reason he invested in quality companies. It is for the very same reason that investors should include passives in their repertoire.