Europe’s passive fund revolution

The UK Local Government Pension Scheme (LGPS) is the nation’s biggest steward of public sector retirement savings by membership, responsible for nest eggs almost 6 million members worth 275 billion pounds. So the revelation that it’s under pressure from the government to shift more of its money into passive products should be a wake-up call to a stock-picking industry still reeling from the Neil Woodford debacle.
Jeff Houston, secretary to the pension plan’s advisory board, told the Financial Times that “there are elements within government that want the LGPS to be passive” in the wake of Woodford’s move to freeze his fund earlier this year. About 60% of the scheme’s assets are currently with active managers.
Now, no-one should be in favour of government meddling in the investment preferences of an independent body. And Houston didn’t identify who in government was questioning the LGPS’s strategy.
But the disclosure reflects conversations that are taking place at pension providers, charities and other custodians of other people’s money across Europe. And while the region has been slower than the US to embrace the shift towards lower-cost index trackers, the global trend away from active managers is clearly accelerating.
In the US, the revolution has already been televised. Last month, the amount allocated to passively-managed US equities outstripped those in active strategies for first time ever, according to figures compiled by Morningstar Inc. Index-tracking US equity funds climbed to $4.271trn in August, beating the $4.246 overseen by active managers, my Bloomberg News colleague John Gittelsohn reported.
US investors have been quicker than their European peers to embrace exchange-traded funds, (ETF) which is the main product allowing savers access to low-cost products that track benchmark indexes. The US market is worth almost $3.9 trillion, compared with just $890 billion in Europe, according to figures compiled by research firm ETFGI. The US ETF market has more than quadrupled in size this decade, while its European equivalent has only tripled.
But the momentum in Europe is gathering pace. At Amundi SA, Europe’s biggest asset manager, passively-managed funds accounted for 7.7% of the 1.5 trillion euros of its total assets by the middle of this year, up from 6.6% at the end of 2018 and 5.8% in 2017. Exclude the firm’s substantial Treasury holdings that are mostly held in cash, however, and the passive percentage climbs to 9% this year.
And the ETF market is attracting money even as other parts of the fund management industry suffer outflows. Amundi’s passive business, for example, had net inflows of 7 billion euros in first half of 2019.
So far this year, the supply of ETFs in Europe has grown by almost 23%, handily beating the 16.5% expansion in the US. In the past three years, the volume of European ETFs has increased by almost eight percentage points more than in the US. Even with that growth, the bulk of Europe’s savings are still in active products.
—Bloomberg

US active managers who have reacted to the threat to their livelihoods by calling index funds a bubble are whistling past the graveyard, as my Bloomberg Opinion colleague Nir Kaissar argued earlier this week. The overseers of European portfolios should brace for the day when passively-managed money overtakes its active counterpart – a day which is probably coming sooner rather than later.

—Bloomberg

Mark Gilbert is a Bloomberg Opinion columnist covering asset management. He previously was the London bureau chief for Bloomberg News. He is also the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”