There is a very interesting set of events happening globally - a couple of US fund houses, including JPMorgan, have taken the call to convert four of their funds into exchange-traded funds (ETFs).
The asset under management (AUM) of these four funds is $10 billion. While $10 billion sounds massive, it is only a speck of JPMorgan’s massive $2.6 trillion AUM.
79 percent of this AUM has ranked in the top 2 quartiles over a 10-year period and yet they are looking to expand their passive basket - which currently stands at 36 ETFs with $64 billion in assets.
Meanwhile, Bloomberg Intelligence estimates suggest that active managers could bring nearly $100 billion to the ETF industry through fund conversions as well as other internal asset moves.
In this episode of ‘Mutual Fund Corner’, CNBC-TV18’s Sumaira Abidi spoke to Swarup Mohanty, CEO at Mirae Asset Global Investments, and Manoj Nagpal, MD and CEO at Outlook Asia Capital, to discuss what are the lessons for the Indian market.
On AMC converting from active to passive, Mohanty said, “This is a US phenomena and it is true that this shift from active to passive continues to dominate the global investment environment or the industry, as more and more investors have started preferring passive as a better investment tool to manage their assets. The mutual funds in developed markets like the US have started converting their mutual fund portfolios into ETFs."
"Today as we speak, more than 40 billion worth of mutual fund assets have already been converted into or active mutual fund assets have been converted into ETFs and more fund houses like JPMorgan have already signaled 10 billion to move into the active space by 2022.”
“The Bloomberg intelligence is estimating and I hear that their estimate is an active managers could add up to 1 trillion to the ETF industry via the conversion of active mutual funds and internal assets to ETFs. So, the shift is somewhere is real.”
“You can launch a new fund but, you have this existing set of investors already aligned to a particular strategy, and the only issue is underperformance to the benchmark. So, if you align them to the benchmark, it is an easier way out for the funds is my view.”
Talking about this trend in India, Nagpal said, “India per se, the stage where we are in India is slightly behind where the US markets and US markets have gone through that evolution of investor understanding this change that is happening."
"Now, the second most important thing, a lot of people, we tend to miss is that ETFs in the US markets have certain tax advantages that mutual funds don't have and that is one of the primary reasons obviously, there is the cost advantage, there is the transparency advantage now, we have to understand and there is a tax advantage that US investors have in ETFs. Now in India, there is no tax advantage in ETF vis-à-vis a mutual fund and secondly, the transparency in a mutual fund in India is also significantly higher as compared to the US market."
"ETFs offer, obviously, your daily portfolio strategy but there are a couple of advantages in ETFs in India, which are already better than the US market. I think hence that trend of active mutual funds shifting to ETFs in India may still be a little further away for us.”
He added, “I think we are in the first stage where the passive market also has started growing and that trend will continue. But this conversion may not happen as quickly as that is happening in the US.”
For full interview, watch accompanying video...
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