Laurent Simeoni (ING) : active management, passive management
Active management of funds of funds sometimes capitalises on passive management, and vice versa. An interview with Laurent Simeoni, head of Portfolio Management Services at ING.
How would you analyse the recent performance of the funds market?
Firstly, I would like to specify that the funds market has become a dual market as we now need to differentiate between the market of “active” funds and the “passive” management of funds, using trackers and index funds listed on the stock exchange to reproduce the performance of a reference market. A Morningstar study based on 750 active management funds showed that only 40% of them had outperformed their reference index during the last five years, even before taking into account the management fees billed by the managers of these funds. This phenomenon explains the growing success of passive management over the same period. However, this finding needs to be put into perspective: in a bull market, passive management is suitable for generating performance, but in the opposite scenario, in a bear market, active management can outperform, in particular if good managers and good geographical areas are targeted. From a general point of view, For instance active management under-performs in the United States, where the market seems to be more efficient, whereas it stands out more easily in Europe and emerging countries. The renewed volatility observed in early 2018 enabled investors to notice that good active managers outperformed passive managers.
“We are entering an active version of passive management.”
How does this impact your performance?
Our fund specialists compile portfolios by combining strong convictions about active managers and using passive funds in geographical areas where active management struggles. This meant that ING’s funds of funds in Luxembourg performed very well in 2017. The ING Aria Lion Balanced fund - 50% shares - ended the year up by 5.03%. The ING Aria Lion Aggressive compartment - 100% shares - delivered a performance of +8.83% compared to +6.49% for the Euro Stoxx50 index in 2017. These results place our funds of funds in the top ranking of funds profiled in the Luxembourg market over the last year.
What risks and opportunities do you identify?
The main risk to the fund industry lies precisely in the continual craze by investors for passive management and other Exchange Traded Funds (ETFs). If ETFs were to gain a market share that is too large, this would create a bubble situation. According to the association of US asset managers, the liability of trackers in the United States corresponds to 13% of all listed and non-listed funds. 25% of US domestic share funds are indexed. In Europe, ETFs represent scarcely more than 1% of listed liabilities. We are still a long way from seeing the asset management market flooded by passive funds. The real risk probably comes more from investors that keep falling out of love with active management. For example, in the United States, in 2016, domestic active funds lost 277 billion dollars, while indexed ETFs and traditional index funds gained 167 and 115 billion dollars respectively. Investors have clearly made their choice between conviction management and product cost.
Do ETFs present risks?
In Europe, the debate over the structural risk of ETFs has always been related to the replication method. Two categories of ETFs exist on the European market: firstly, physical ETFs, which replicate an index by physically holding all or a representative sample of its constituents. Then we have so-called “synthetic” ETFs, which offer index performance via swaps, which are derivative products. Both methods have risks as physical ETFs sometimes make use of securities loans. We must remember that during the 2008 financial crisis, some ETF issuers experienced real problems with liquidity or unwinding of these securities loans.
What is the impact of MIFID II on funds?
The new rules of this legislation require transparency of the costs incurred by the investor in a fund. This legislation could represent a threat to active funds, as they are often expensive. Active management companies are currently trying to reduce their costs by providing less expensive fund units or by reducing administrative costs. At the same time, more intelligent, but also more expensive trackers are appearing on the market. These ‘Smart Beta’ trackers allow investment according to criteria other than market capitalisation, which governs traditional stock indexes. They offer a number of prospects for diversifying a portfolio or outperforming traditional indexes. We are entering an active version of passive management.
How does a company like ING adapt to this context?
In recent years, ING in Luxembourg has developed genuine expertise, recognised within the ING Group, in managing funds and funds of funds. Our expertise was solidified in 2017 with the launch of a range of tracker funds. This product is now distributed in Germany, Austria and Luxembourg, joining the existing range of five funds of funds and three bond funds already managed by the Portfolio Management Services team.