Fureyous

Just letting everyone know that if I am selected for the Commonwealth Games I will politely decline.

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First post in a little while and I’m back with my reader’s (both of them) favourite post…the AUstralian Government Bond Yield Curve (I know this as its the most searched and looked at posts on my blog)…anyway…I digress. ..

What an amazing two weeks in bond markets. As the chart shows there was a strong srop in bond yields during August and since that time the shorter end of the yield curve has increased sharply in less than two weeks. Much of this gain was driven by solid equity markets and the relatively decent economic news that has been out in this month but the sharpest increase has really occurred over the last two business days following the better than expected unemployment figures the Australian Bureau of Statistics released on Thursday.

For the first time in a little while bond markets are now showing a reasonable chance of a Reserve Bank interest rate rise. My personal belief is that overseas weakness (namely US, Japan and Europe) may still prevent this from happening but I’m not going to argue with the market and I agree the chances have definitely increased given our good local economic data. This morning China also released some strong economic growth figures which looks good for us, but then that is the past and I’m sure China would still like to slow the rate of growth down a fair bit yet.

Anyway, looks like the best time to fix your mortgage interest rate was probably two weeks ago and the average mortgage cost is looking a tiny bit more expensive for the moment.

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I found the above chart in an article at marketwatch.com and it shows the net cash flows of both active and passive managed funds in the US over the last 10 years. As can be seen, whilst passive funds (or index funds) have had positive flows every single year, actively managed funds have had massive outflows the last four years and net outflows six out of the last ten. Now these numbers are distorted a little, in so far that actively managed funds manage many more assets than passive managers so proportionately the differences wouldn’t be as exaggerated.

Either way, this trend of moving from active to passive has occurred in Australia also. Particularly in recent years with the extreme volatility of equity markets. Retail investors and their advisers are abandoning actively managed funds in favour of passiveyl managed funds for three simple reasons…

1. Simplicity…you know what you are going to get…the index minus some costs
2. Transparent…there will be no hidden surprises thanks to bets gone wrong (think Challenger AUstralian equities and their bets on ABC Childcare and Babcock and Brown)…you know exactly where you are invested and in the case of the Australian equities you see the performance on the news every night
3. Low cost…whilst I and many others believe it is possible to generate alpha, unfortunately managers find it very difficult to achieve alpha after their fees are taken out…this is particularly the case with bond funds

From an advisers perspective, using passive fund managers simply means the only concern is asset allocation and no action required should the key people leave the fund 452-style or the fund blows up performance-wise…increasingly advisers are realising this and they are focusing on their business and clients as opposed to wasting their time positioning themselves as investment experts.

With the expansion of exchange traded funds (ETFs) in Australia, and they are just index funds at this stage, and the MySuper recommendations from Jeremy Cooper, I can really only see massive growth for passively managed funds in Australia and significant funds outflow for the actively managed. This risk to massive flow to index managers is that prices can be inflated without consideration to value (tech boom to provide an exaggerated example and therefore providing opportunity for the active manager which is not a bad thing) but the chances of a bubble in equities in these risk averse times  appears a long way off.

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