Brooks Macdonald: Now is a dangerous time to invest in passives

Added 10th May 2017

The hype around passive products has never been more intense, but Brooks Macdonald Asset Management's Jon Gumpel warns that there could be danger ahead for passive investors.

Brooks Macdonald: Now is a dangerous time to invest in passives

There has been a tremendous amount of fanfare around the passives industry, as many active managers struggle to justify fees against lacklustre performance.

Because of this, active managers and wealth managers have felt additional pressure to hop on board the passives train and expand their product offering.

Portfolio Adviser surveyed a group of global asset managers with substantial UK operations back in April and found that 69% of respondents felt the perceived threat from passives would push them to develop their own trackers.

Before a CISI debate on active versus passive investing, a group of wealth managers were asked which management style they were currently favouring. 

Though a slight majority came out in favour of passives ahead of the presentations, 75% were in favour of active management following the debate.

In the active versus passive debate, Gumpel is pretty firmly on the side of the active managers.

But, the Brooks Macdonald co-founder and manager of the Defensive Capital Fund thinks there is a very practical, non-partisan reason to be wary of passive products.

Market dispersion is on the rise, he said, which should provide a major headwind for trackers and a beneficial tailwind for active managers.

“Passive funds benefit from low dispersion. And following the US election, the S&P 500’s 3-month return dispersion has rebounded after an extended period of being quite low.  

“To my mind, there’s a real danger in being in passive strategies at the moment with the scope for a dispersion to increase dramatically. That will be a time that active managers should be able to outperform.”

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