More often than not those individuals or organisations with money to invest call on the services and expertise of a variety of money managers to look after their assets and take care of their securities portfolios. The management of portfolios obviously comes at a cost, usually in the form of fees based on a percentage of assets under management. As such fees don’t present a conflict of interest per se, in that it’s as much in the interest of the money manager as it is for the client to see the portfolio grow.
But fees – sometimes many layers of them - do eat into generated profits and can significantly reduce return on investment. Money managers justify such fees on the basis that they have the knowledge and expertise to generate returns on investment that outsiders would not be able to achieve.
But now it is exactly their self-proclaimed expertise and knowledge that is reigniting the debate on whether the active management of portfolios actually pays off. Amidst increasing evidence that active money managers are unable to outperform the market in any sort of consistent manner, it is expected that passive investing will continue to gain ground.
Passive management usually involves the tracking of an index. By buying into index funds passive managers tend to obtain good diversification and can maintain low management fees. Since indexed funds have outperformed the majority of active managers, especially after fees, it has grown in popularity.
The rise of passive investing should go hand-in-hand with the fall of fund fees. But worryingly the new trend of closet index hugging has reared its ugly head, with some players marketing mutual funds or portfolios of equities as being actively managed and charging fees accordingly, whereas they are actually merely tracking an index. This practice is particularly detrimental to less experienced individual investors.
All in all the rise of the “tracker”, if and when marketed appropriately, is good news for those looking for a low cost way to invest and spread risks. But it can still be daunting to choose amongst a wide array of options.
Automated investment services to the rescue! … Or not?
Sometimes called robo advisors, these platforms automate your investment portfolio and try to help you reduce fees, increase efficiencies and streamline your process through a simple computerised interface. Platforms such as Betterment and WealthFront offer a diversified portfolio of low cost ETFs. All an investor needs to do is choose a stock and bond allocation, and they do the rest.
Whereas fees are very low and the premise is simple, individual investors should keep a wary eye on the evolution of these platforms, since their practices may actually warrant further and deeper investigation, lest these platforms themselves succumb to the temptations of making an easy buck as closet index huggers in disguise. Watch this space!
Further reading:
Medium - You Will Be Investing For Free In 5 Years
BETTER FINANCE - Smart Beta: deceiving investors at the press of a button?
FT - The future is bleak for closet trackers
Funds Europe - Passive Funds Beat Active Funds Once Again