Research conducted by S&P showed that in recent years, passively-managed index-based funds have outperformed actively-managed funds by double-digit percentages.
S&P Global Senior Director and Global Equity Indices Head John Welling presented at the IFN Investor Asia Forum: “During the most recent one-year period, 60% of active fund managers underperformed the S&P500 index. That proportion of underperforming portfolio managers increases to 80% over a three-year period.
“It is more difficult to outperform index-based benchmarks over longer periods. This research is data-led. It shows where active (fund management) is working and where it is not.”
Many of these passively-managed funds are exchange-traded funds (ETFs), which track various benchmarks, typically indices. On the Shariah compliant investment front, an important reference is the Dow Jones Islamic Market World Index – launched 25 years ago and operated by S&P Dow Jones Indices.
John noted that a large contributor to returns for both conventional and Shariah benchmarks over the past several years have been technology stocks – particularly in Shariah indices, due to relatively higher representation.
“It is clear that Shariah investors increasingly favor the transparency and cost-efficiency of passive products,” said John, with S&P Dow Jones Indices and Morningstar data showing Shariah ETF assets under management (AuM) more than doubled since 2022.
John said the five-year AuM compound annual growth rate (CAGR) of 57.9% from 2017 to 2024 for Shariah ETF AuM is far higher than the 10-year AuM CAGR of 17% from 2013 to 2023 for all global ETFs – reflecting the rising trend of asset gathering in passively-managed fund products.
With the inclusion of conventional funds, S&P Dow Jones Indices and Morningstar data showed global ETF AuM was US$12.19 trillion as at the 31st July 2024. “This growth is phenomenal. This is the general backdrop of what passive ecosystems are capable of,” said John, noting that latest data showed the share of passive equity assets AuM had grown to over 50%.
The shift to passive index-tracking has gone beyond ETFs.
“Market share moving from active to passive (management) in fixed income is accelerating,” John said adding that this share had now grown to between 25% and 30%, according to research findings by S&P Dow Jones Indices.
“We have similar scorecards for fixed income funds, which share an overall message. Index-based passive investment works. S&P findings support the case for an increased Shariah compliant passive investment adoption.”
