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Rarely has the cost of investing come under such scrutiny. And rarely with such sustained intensity. With most active equity portfolios having failed to beat their benchmarks since the 2008 debt crisis, regulators and investment consultants seem to have lost patience with the large number of funds whose persistent underperformance is matched by their persistently high fees.
So too has the financial press. The growing disillusionment with actively managed funds and investment gatekeepers’ focus on cost are transforming the financial landscape. Passive investing is firmly in the ascendancy.
Since the end of 2007, passive exchange-traded funds (ETFs) have accumulated a net USD1.7 trillion of investment inflows. That contrasts with the USD1.2 trillion drained from actively managed vehicles over the same period. From the perspective of an individual investor, the shift makes sense. Index-tracking funds charge lower fees. And it is also true that they have delivered better returns than the average actively fund after investment charges.1
Problems are sure to arise, though, if indexation becomes the dominant form of investment. In such a scenario, it is not clear whether the financial market will be able to allocate capital efficiently. Nor is it certain that corporate executives will be held to account. There is also the prospect of entire industries falling under the control of just a few passive investment firms – a development that could erode the pillars of the free-market economy and stifle innovation.
The enthusiasm for index-tracking is born out of regulators’ and consultants’ desire to control cost. That is a laudable goal. But the longer-term costs that will emerge from the continued expansion of passive investment have not been properly assessed. If the majority of investors embrace them, index-trackers threaten to sabotage the very system upon which they were built.
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This document is used for informational purposes only and does not constitute, on Pictet Asset Management part, an offer to buy or sell solicitation or investment advice. It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date. The effective evolution of the economic variables and values of the financial markets could be significantly different from the indications communicated in this document.
Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to change without notice. Pictet Asset Management has not taken any steps to ensure that the securities referred to in this document are suitable for any particular investor and this document is not to be relied upon in substitution for the exercise of independent judgment. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. Before making any investment decision, investors are recommended to ascertain if this investment is suitable for them in light of their financial knowledge and experience, investment goals and financial situation, or to obtain specific advice from an industry professional.
The value and income of any of the securities or financial instruments mentioned in this document may fall as well as rise and, as a consequence, investors may receive back less than originally invested. Risk factors are listed in the fund’s prospectus and are not intended to be reproduced in full in this document.
Past performance is not a guarantee or a reliable indicator of future performance. Performance data does not include the commissions and fees charged at the time of subscribing for or redeeming shares. This marketing material is not intended to be a substitute for the fund’s full documentation or for any information which investors should obtain from their financial intermediaries acting in relation to their investment in the fund or funds mentioned in this document.
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