Passive investing, or the strategy of tracking a basket of assets or an index instead of actively buying or selling stocks, is gaining traction globally and changing the regional trading landscape, an investment expert from Swiss investment bank UBS said.
This means investors these days have to understand global fund flows that are, in turn, influenced by rebalancing cycles of major indices such as those provided by MSCI.
“In the past, traditionally, share prices are influenced by earnings, growth and quality of management. But now, while it continues to be driven by earnings, growth and quality of management, now you contend with all the passive flows from passive funds,” Richie Diaz, executive director and head of client trading and execution at UBS Securities Philippines, said in a press briefing last week.
In the Philippines, Diaz estimated that the value of passive funds tracking MSCI Philippines alone amounted to $4.2 billion. This is based on the country’s nearly 1-percent weight in MSCI Asia. Other passive trackers are FTSE and Wisdomtree.
UBS estimated that globally, assets under management (AUM) of passive funds amounted to $16 trillion globally. Boston Consultancy estimated that by 2022, passive funds’ AUM will reach $25 trillion, Diaz said.
As opposed to active investing where you have a portfolio manager who uses deep qualitative and quantitative analysis to outperform a benchmark, passive investing maximizes return by minimizing buying and selling of securities by tracking a basket of assets or an index. The most common way of passive investing is participating in an exchange-traded fund (ETF), Diaz said.
Diaz said passive investing had been gaining popularity due to lower minimum investment, lower cost, zero performance fees and higher liquidity compared to actively managed portfolios.
“Over the last three years, you see the magnitude of the growth of passive funds,” Diaz said, noting that passive investing has thus become among the new price change influencers alongside hedge fund arbitraging (which uses leverage to magnify returns) and quantitative investing (which uses tools and algorithms to analyze past asset price movements to make automated trades).
On the equities market, UBS sees the Philippine Stock Exchange index (PSEi) recovering to 8,900 by the end of this year as a more benign inflation environment will ease interest rates and boost consumer spending. This suggests an upside of 19 percent for the main index from the 7,466.02 finish last year.
“The things that caused the market to be weak in 2018 are all reversing in 2019,” said UBS Philippines head of research Jody Santiago, noting that the local inflation rate hit close to a 10-year high while consumer spending growth was at an eight-year low last year.
A briefing was held last week at the opening of UBS’ three-day Philippines CEO-CFO Forum 2019 that sought to drum up investor interest in local investing opportunities. About 150 high-level company officials and thought leaders attended the conference.
“Consensus view on the Philippines is very positive because it’s a very high-growth economy. Also, last year was an aberration,” UBS Philippines country head Robbie Go said in an interview.
UBS expects Philippine corporate earnings this year to grow by 12.5 percent compared to an estimated 8.5-percent growth last year.
While the projected growth differential between this year and 2018 appeared small, Santiago explained that this included sectors such as telecommunications and utilities, which typically grew slower than the entire basket.
UBS favors the property, banks and consumer sectors this year.