Sunday, September 23, 2018

DOES PASSIVE FUND MANAGEMENT IS NIGHTMARE?

Managing the passive investments is now going to be a nightmare for the global fund managers. Trade war and uncertainty about the global market arising from the same has kept a nightmare for the global fund management.  Pessimism about the global markets in the next 6 months to 12 months has kept the fund managers awake at night.  The long-term investments avenues continue to pour its trillions into the kitty of the investment pots without thinking about where the inflow will be invested. Contrarian investment strategies have now turned into a nightmare.  

 It’s true that accumulation of long-term portfolio happens during the worst time of the markets but when the time itself is going to be prolonged then the risk of investment amplifies at every lower level of the global markets.  According to some market reports the Money market funds were holding $2.84 trillion through July, an increase of 7.1 percent from the same point a year ago, according to the Investment Company Institute. Taxable bond mutual funds had assets of $3.46 trillion, a 12-month rise of 5.7 percent. The global markets are at tough times and hence every fall is an opportunity but that opportunity itself is now turning to be a nightmare since the fall is going to be steep keeping the global macros in mind.

The biggest challenge for the fund managers across the globe is that they cannot hold in cash and they have to deploy after a certain level of cash levels increases to comply with the regulatory aspect. Now falling market has every time new low levels and this investment deploy increases the risk at ever new level created.  Inflows will dry with falling market to match the sentiments but it will not dry down. Further when redemption pressure would amplify when global markets go for a toss then the risk of selling quality stocks and scripts comes into play which further amplifies the problem for the fund managers. Passive investments which are benchmark linked would face stiff tough times as global market outlook looks pretty scared with ongoing global macro factors.  If the broader market goes for wild swing then investing in passive would be a nightmare since ever new low will erode the capital invested at the earlier low.

If we look at the global market we find that the September ‘Global Fund Manager Survey’ had 244 respondents with $742 billion in assets under management. The Bank of America Merrill Lynch (BoAML) fund manager survey, which is published each month, found the percentage of fund managers that expect the global economy to slow down in the next year had jumped from 7% in August to 24% in September. On the other hand, cash balances climbed just one percentage point to 51% between August and September, BoAML said this level was an 18-month high.

Apart from trade war China slowdown, Winding up of QE, Credit Crisis, Brexit has kept the fund managers awake at night since all these events are having a global impact on the different asset class. Any credit downgrade of an economy or company can create a contagion call on the investments.  When cheap money is being pulled back and currency volatility intensifies the risk of credit slippage just a part of the game.

Rebalancing also seems to be a difficult task since for rebalancing one needs another asset class.  Debt market yields are another shock due to a trade war and currency volatility.  The rebalancing stands out to be another herculean task at these turbulent outlooks of the global macro makes every asset class to have a downfall.


Cash is king but in the hands of the investor alone. But doe this means that the periodically auto investments should be called off the answer is left for the global fund managers and not to an economist. Investing in passive is tough a job now as global complicacy intensifies.

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