Increasing interest rates will hurt inefficient companies and leave passive investors in the cold, according to Mirae Asset.
Speaking on a panel as part of the 2018 FSC Summit in Melbourne on Wednesday, Mirae Asset Daewoo managing director Peter Kim said low interest rates have benefited poorer performing businesses.
“Thirty years of grinding down to lower interest rates rewards inefficient companies, and it rewards things like ETFs,” he said.
“You’re buying whatever’s in the index and there’s no reward for distinguishing the good companies from the bad, and quite often in these kinds of cycles the bad companies will be rewarded more.”
Mr Kim said rising interest rates will put increasing pressure on passive investment strategies, adding that active management will likely become more popular as this happens.
“Now we are seeing higher interest rates, and I think when those higher interest rates do their thing and start to punish weaker companies, I think active management will come back.”
Fellow panellist and AMP chief economist Shane Oliver shared similar concerns with the current popularity of passive investment products.
“The last time I recall so much interest in passive was about 1999 or 2000 and it does worry me that we’ve gone through this long period of offensive growth in IT stocks, in the US share market particularly,” he said.
“As IT stocks go higher, value-based managers and active managers tend to underperform, but the index funds will have a much higher exposure to tech stocks.
"Unfortunately, all those investors who piled into passive investments and ETFs will find themselves massively overweight in the sector that’s massively underperformed and is massively overvalued," Mr Oliver said.
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