The trend of passive funds beating active funds is now visible in midcap segment: Koel Ghosh, S&P Dow Jones Indices

In recent years, while active mutual funds have grown manifold, passive funds have not been behind. Moreover, Indians have found new avenues to diversify their portfolio, including investing in global passive funds. ETMarkets caught up with Koel Ghosh – Head-South Asia, S&P Dow Jones Indices & CEO, AIPL, to understand new emerging trends in the sector and challenges that remain. Edited excerpts:

Given that India is a developing economy, won’t active investing work better in the country?
Over the last few years, the S&P Indices Versus Active Funds (SPIVA) India Scorecard has been continuously demonstrating the active funds in the largecap category continuously lag the S&P BSE 100 benchmark. While we have witnessed active managers struggling to outperform the benchmark in the largecap segment, the trend is now more visible/ prominent in the midcap space as well, over the last one year, ending 2021.

The outperformance of the midcap benchmark is over 50% and that trend is maintained in the large cap space as well. A recent
S&P Dow Jones Indices study shows that during low dispersion environments (the spread of returns within an index is modest), active managers need to cover a set of fixed costs—management fees, research expenses, transaction costs, etc. and hence the value for the client is less. As a result, we presume that more active managers will underperform when dispersion is low. In a higher dispersion environment where the spread of returns within an index is wider, the active manager has some opportunity to provide additional value.

Active investing in India continues to be strong and we also see a significant shift towards passive investing, with the interest and the exponential growth in the space over the last year being encouraging. There has been growth in both assets and the number of products available, with a significant shift in trends moving from market beta products to factors.

Most of the world is going through an energy and power crisis. India still relies on coal; Europe is rushing to secure crude, gas supply. At this point, many are questioning the practical aspect of ESG investing. How would you respond to them?

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While India is very nascent in ESG adoption, ESG investing on a global scale is a fast-growing area. According to Morningstar, the assets under management globally in sustainable funds are at 2.77trn with 82% housed in Europe and 12% in US. Participation in this asset class is seeing a global uptake at a tremendous pace. As we see the ESG market grow and continue to evolve, two specific elements will be essential for further growth, progress on sustainable goals and market confidence: transparency and impact. Transparency is key to ensuring that insights and analytics can be interpreted appropriately and a company’s approach to sustainable practices has an impact on society. Transparent and rigorous ESG scoring is an essential tool for market participants to evaluate and optimize their societal impact. For example, companies that use more environmentally friendly practices like reducing carbon emissions result in enhancing the air quality, thereby benefiting the society. This is being driven by market demand and education around this space is important.

Factor investing has been in the country for a while now, but it has failed to pick up. Why do you think so?

There is a growing interest in factor indices over the last year, with strategies that gather assets such as low volatility and value. Factors can be both defensive and cyclical in nature. Quality and low volatility factors tended to be more defensive, while the dividend, value, and size factors displayed procyclical characteristics. Single-factor portfolios could potentially act as tools for implementation of active views, or alternatively they could be blended in multifactor portfolios that aim to deliver smoother excess return across business and market cycles. Different market regimes support different strategies and Indian product providers are steering towards offering the factor basket in the passive space aftermarket beta has been in play for a while.

What is the biggest challenge for index providers right now?

S&P Dow Jones Indices (S&P DJI), as an independent index provider, offers indices which represent various market segments and investment strategies. With our broad range of innovative index-based solutions, research and data, our aim is to offer choice to the market participants.

A recent S&P DJI estimated that indexing has generated approximately $357 billion in cumulative savings in management fees. Though this study used S&P DJI’s core U.S. equity indices, one can imagine the increased savings if we considered all indices linked to passive products. Thought leadership and investor awareness is essential for more adoption for index investing and that’s the need of the hour.

S&P 500 saw some flow from India during the pandemic. Now after a sell-off, where do you see interest emerging?
The interest for international diversification saw a huge interest in the region last year. The pandemic and the market dynamics steered many towards global markets to diversify the risk reward in their portfolio strategies. As we await RBI to extend international limits for product providers, there is still a growing interest in international strategies such as electric vehicles, other geographical exposures which is clear in fillings by product providers. Post pandemic, innovations in investment products have been welcomed and concepts such as metaverse and artificial intelligence driven strategies are also receiving some interest.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times.)


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