If the US experience is anything to go by, the "huge rotation" into passive strategies still has a long way to run in Australia, says Tria Investment Partners.
Twenty per cent of Australian equity funds are managed passively, compared with 40 per cent of the domestic US equity mutual funds markets, said consulting firm Tria Investment Partners.
While past flows are not necessarily indicative of future flows, the experience in the US is ominous for the Australian active management sector, said Tria.
"The huge rotation to passive strategies underway in the US is incredibly value destructive for active managers," said the consultant.
The underlying factors driving the move to passive investment are largely common to both Australia and the US, said Tria.
"[They include] the perception that active managers have disappointed while charging high fees; and pressure for portfolio constructors to drive down costs," said Tria.
"Meanwhile, active managers have failed to mount a concise and consistent public defence of the active management proposition.
"The debate isn’t being lost – it’s not even being fought. There is much work for active managers to do to make their case heard."
The implications of the continued flow into passive assets are obvious, said the consultant: lower profit margins as the assets flow to lower-cost (and lower-margin) products.
"Pressure on fees is so intense that the rotation to passive can be expected to continue," said Tria.
"Even if it doesn’t get as extreme as it is in the US it’s still concerning for active managers. Managers should view the US experience as a warning sign – the time to act is now."
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