As part of its statutory oversight of the Australian Securities and Investments Commission (ASIC), the PJC issued a report last week into the role of gatekeepers in Australia’s financial services system.
The report included responses from the participants of a ‘Gatekeepers Roundtable’ to a number of questions on notice.
BT Financial Group was asked to comment on the rationale for the higher fees that are charged by active fund managers compared to passive investments.
In framing the question, the PJC made reference to a recent paper published in the Journal of Economic Perspectives by American economist Burton G. Malkiel, which “indicates that over the last 30 years, passively-held index funds have substantially outperformed the average active fund manager”.
In response, BT Financial Group head of government and industry affairs Ryan Bloxsom pointed out that past performance over the last 10 or 30 years is “not necessarily indicative of future trends and outcomes”.
In fact, there are indications that “we may be currently going into a different [investing] environment”, he said.
The advantage of active asset allocation is that it allows investments to be managed through each economic cycle, he added.
“Passive investing cannot provide the downside risk management that is only possible with active management,” said Mr Bloxsom.
“This involves tilting a portfolio by holding more in asset classes likely to outperform and holding less in asset classes likely to underperform.”
In addition, the view that passive management should be a starting point for investment is “flawed”, he said.
Because benchmarks tend to be weighted by market capitalisation, more of a passive portfolio is held in securities that are worth more, and less of the portfolio is held in securities that are worth less – which is “somewhat arbitrary”, said Mr Bloxsom.
“This effectively embeds a momentum process into the stock selection, emphasising past winners in the portfolio and ignoring value opportunities,” he said.
Passive approaches also make the assumption that stock prices are always a reflection of true value, which “ignores diversification across sectors and size and can lead to undiversified portfolios of assets”, said Mr Bloxsom.
Passive strategies also fail to consider the outcomes required by the investor, he added.
“In the S&P/ASX 200, there is presently a large overweight tilt to bank stocks. A passive investor will therefore have a corresponding large overweight allocation to this sector. This is a risk that passive investing cannot address,” said Mr Bloxsom.
