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An important milestone was silently crossed in the US asset management industry. According to Morningstar, for the first time in history, index fund holdings exceed their holdings in actively managed funds. As of March 31, 2022, index based mutual funds had $8.53 trillion of assets under management (AUM) compared to $8.34 trillion invested under actively managed funds.
Ever since Warren Buffett won a bet placed in 2008 claiming that index funds would beat actively managed funds, the passive fund industry has grown by leaps and bounds.
The index fund industry started in 1976 when John Bogle, the late founder of the Vanguard Group, launched an $11.4 million NFO called the Vanguard 500 Index fund. Since then, many AMCs have launched passive funds.
By 1993, active funds were still 60 times bigger with an AUM of $1.25 trillion as against an AUM of index funds of $21 billion. A decade back, the gap narrowed to three times – passive funds were $1.87 trillion compared to $5.47 trillion of active funds.
But a large amount of inflows since quantitative easing went into passive funds, with index funds now managing $8.53 trillion as against $8.34 trillion by active funds.
A similar trend is visible in India, though the gap is still huge and may take a while before passive funds make their presence felt. As compared to an industry of Rs 37 lakh crore, exchange traded funds (ETFs) and index funds accounted for around Rs 5 lakh crore or around 13.5 percent.
However, index funds have started making a dent in the performance of AMCs. Operating margins of AMCs are shrinking and the decline is likely to continue in the near future as NFOs in the passive fund segment are garnering more money than the active funds.
In the US, according to Morningstar, index investors saved $38.6 billion in fees in 2021. In India, even though AUMs of fund houses have increased in FY22, their profits have declined as investors preferred to park their funds in passive funds or debt funds. Most of the new launches are in the passive funds’ segment. In July 2022, 18 AMCs launched 28 new schemes, most of which were in the passive or debt fund segment.
The inability to generate alpha by active funds and their high cost of operations have nudged investors, especially retail investors, to park their funds with passive funds. When it comes to fund management, being average is better than holding on to an under-performing fund.
While being average may work in the mutual fund space, it certainly does not in corporate performance. Our research team has cracked open the quarterly performance of companies announcing their results and to everyone’s surprise, Zomato has posted better than expected numbers, while strong players like Sun Pharma and Escorts have disappointed.
Investing insights from our research team
What else are we reading?
Investors grow frustrated with hedge funds after historic losses (republished from the FT)
Shishir AsthanaMoneycontrol Pro