F&P Quarterly: Passive investment strategies – silent owners are increasing

June 2017

Passive investment strategies silent owners are increasing

Flows in asset management speak for themselves – passive investment strategies and thus passive ownership of publicly listed companies is increasing.

The popularity of passive investment strategies does not seem to weaken – rather the opposite. Products in this category are generally cost effective and as many active fund managers have struggled to generate access returns defending their management fees, a lot of investors have embraced this alternative.

Statistics are clear
Statistics from the Swedish Investment Fund Association confirm the picture. Total assets in passive investment strategies in Sweden account for 14.6 percent of all savings Swedes have in equity investment funds. That number is not huge as such, but the trend is convincing. When looking at new capital allocated into mutual funds during 2016 in Sweden, as much as 70 percent of total flows was allocated to passive investment strategies.

Robo-advisors add to the hype
The trend with passive investment products is also preferred by up and coming robo-advisors on the FinTech scene. For example, using ETFs is a liquid way to access different asset classes and geographical markets and is commonly used as a cost-effective way to build portfolios and engage in asset allocation. Perfect for low margin business models like robo-advisors.

Dynamics of passive ownership
Looking at large listed companies on Nasdaq they generally do not have a massive part of their ownership through passive mandates yet, but the trend is too strong to ignore.

As most of the passive investment products mainly invest based on market cap and the composition of a specific index, passive managers will – as the concept implies – be passive, not engaging in any company specific activities. This adds another angle to the investor relations dynamics. Normally the aim of successful IR work is to manage expectations – but the passive managers couldn’t care less. For them, it is all about data and algorithms.

Will publicly listed companies need to change the way they are working?
As a company executive, you should be aware and have a basic understanding of the passive strategies – but as you can’t impact them, the efforts and priorities should probably be elsewhere. ‘Classic’ investor relations work – i.e. targeting preferred owners and building relationships, having a clear equity story, being accessible – is not likely to go out of style anytime soon.

The Fogel & Partners team wish you a great summer!