Institutional investors lead shift towards passive investing in Asia

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Institutional investors lead the shift towards passive investing in Asia – interview with Simon Karaban, head of index services at the Singapore Exchange (SGX)

In Asia, the trend towards passive investing is being driven by institutional investors rather than the retail market, says Simon Karaban, head of index services at the Singapore Exchange (SGX).

While retail (or individual) investors have more readily adopted passive strategies in places like the US and Europe, they are yet to fully embrace passive investing in Asia.

One reason could be that financial advisers are still incentivised to promote products that come with high commissions, such as mutual funds. New regulations elsewhere, meanwhile, have helped promote cheaper, passive products. The US, for instance, is implementing laws that require advisers to act in the best interests of clients, which encourages a shift towards lower fees.

Together with the low return environment that necessitates reduced costs, this means the market for passive products is growing exponentially – expectations are that the global ETF market could nearly double by 2020 from the current value of US$3.4 trillion. Factor-based indices such as smart beta and risk premia are driving much of the growth.

The increasingly competitive passive indexing market is placing downward pressure on fees, which in many respects is good for investors.

But Karaban says one downside of the race to the bottom when it comes to ETF fees is that fee cuts can be made at the expense of value-add services such as product education, which ultimately is negative for investors.

The domestic market – Singapore

Karaban says there has been a noticeable pickup in demand for ETFs in Singapore across both the institutional and retail markets (despite some restrictions on the types of products retail investors can access in the country).

The Asia-Pacific ETF market remains small relative to the size of the US and European markets, but data shows that growth in the Asia-Pacific is outpacing other regions and the gap is gradually narrowing.

Karaban says, however, that growth in the Asia-Pacific is somewhat hindered by the regional wealth management industry being highly fragmented – except in Australia and Japan, where the wealth management markets are relatively more developed in nature and have scale.