John Davies, managing director & global head of Exchange Traded Products, S&P Dow Jones Indices, who has visited India three times in the last seven years, has never been more bullish on the Indian exchange-traded fund (ETF) market. In an interview, he said that the government’s recent initiative of Bharat 22 ETF has given fresh impetus to passive investment and nowhere in the world has the government so aggressively used the ETF route for divestment. Excerpts:
The Indian government is betting big on ETFs with the recent Bharat 22 fund
That is a great initiative because in no other market has the government used ETFs in such a way. This is unique.
The disinvestment programmes have been going on for a quarter of a century and they have used traditional methods from IPOs to FPOs and it is unique to use ETFs as a way of disinvesting from the CPSEs. I guess the closest example of a government utilising ETFs for policy implementation would probably be Japan where the Bank of Japan has bought Japanese equity ETFs to support their quantitative easing programme. But they started the programme after the CPSE ETF came to market [in 2014], so the Indian government’s use of ETFs in the market is original and unique. CPSE ETF created a wave of momentum and I think the ‘Bharat 22’ is another opportunity to create the second wave of momentum for the ETF market.
But, passive investment is still at a nascent stage in India...
Passive investment is still at a nascent stage here. Our SPIVA (S&P Dow Jones Indices Versus Active) research shows that if you look at the performance of active funds against their benchmarks over various time periods, generally speaking, at least 50% of active managers have underperformed and the key contributor is the fee charged by the fund house.
Investors need to be educated not only about how to manage their investments and how portfolios work but also about cost being a major factor in the overall performance. We have seen in other markets that this resonates with the investors and they then understand that ETFs can get market return for a fraction of the cost of active management.
In fact, this is a big contributing factor around the world for assets moving from active to passive.
Markets are quite volatile currently. In such times, how does passive investing score over active fund management?
If you are invested in a passive product, you are ultimately going to receive market return, regardless of the market volatility. But, in an active fund, you are literally at the behest of the skill of the manager and whether they are good enough to manage the volatility to deliver better returns than the market. You need to understand that as an investor, the passive product is designed to track the market, whereas with active products, you are at the mercy of not only the market volatility but the managers’ skill or lack thereof.
How many ETFs are there in India?
There were 66 at last count managing about $5-6 billion in assets. And, that’s not different from how other markets worked in the early days. There’s no one single big ETF market today that just exploded right out of the gate.
India has got an amazing opportunity with its 1.3 billion population with only 14 million investors.
Yes, it’s going to be a long run to reach out to those 1.3 billion people to invest but actually technology is going to help because an ETF in itself is not an investment strategy, it is a delivery mechanism. An ETF is a disruptive technology in investments.
To my mind, it’s one of the most innovative product developments in the last 25 years. Initially, the access to sophisticated investment strategy was only available to a big institutions. Now, any man, woman, child on the street can get access to the same kind of strategies, asset classes as those big institutions through ETFs.
How do you see the Indian ETF market growing in the next 5-10 years? Where will India be in terms of size?
I cannot give you a hard number as all ETF markets have evolved at different rates; for example, the Australian market doubled over a two-year period, as a result of the implementation of the ‘Future of Fund Advice’ regulation. If you look at it from a global perspective, it took 19 years for the first trillion dollars to be invested, three and a half years for the second trillion to be invested, two and a half years for the third and it has taken only a year and a half for the fourth trillion dollars to be invested. Globally, growth has been exponential.
But, many mutual fund houses in India have started looking at ETFs and passive funds...
That is one of the big changes that we’ve seen here with some of the asset management companies looking at ETFs. It’s not just about having products that try to beat or replicate the market. It is more about the outcome. So, it is all about providing a solution to the client’s desired goal whether it is just simple retirement funding or whether it is to pay tuition fees. There are now ETF specialist managers who will sit with clients and discuss their end goals and risk profiles and then design the investment programme to meet that end goal.
They use ETFs as the implementation tool so that they will actually bring an active overlay to the strategy. The skill is that they manage this active portfolio but the actual securities in the portfolio are all ETFs.
