Investment management through Index tracking is taking up a new growth trajectory in the United Kingdom after major American AMC's like Blackrock, Vanguard and State street take a foothold in the largest financial market of Europe. For investors in the United Kingdom, who have always given preference to active fund management and celebrated stock picker personalities like Neil Woodward, this marks a shift towards passive management after the recent poor showing of active fund management houses in the country. This could also be a sign of British investors becoming more risk averse as they move into 2020 in the Post-Brexit era.
Investment management that is enabled through Index tracking is a type of passive investment strategy. This style of Investing involves holding a portfolio of stocks which mimic a popular index requiring rebalancing only when a change occurs with the Index portfolio itself. This style does not, therefore, require active management and hence charge less fund management fees from the investors and at times can also be free. Funds following these styles thus offer long term capital gain potential with the least possible risk of suffering much devaluation due to short term volatile market movements. These funds may or may not distribute their dividend earnings with its unitholders, based on the terms and conditions detailed in the scheme document.
Funds which are modelled on Index tracking as the Investment management style have achieved huge success in the United States of America in recent years. On 31 August 2019 index-tracking funds in the United States have hit total assets under management of $4.27 trillion surpassing the total assets under management of actively managed funds by $20 billion, which on the date stood at $4.25 trillion. This feat by funds based on Index tracking has not been achieved in the country in a day. During the past one decade, the country has witnessed one of the most dramatic shifts in investor preferences as nearly $1.36 trillion have flowed into Index mimicking mutual funds and exchange-traded funds compared to $1.32 trillion that have flown out of funds that are based on the expensive active Investment management style. The largest and the most powerful of such index-tracking funds offered by the likes of State Street Global Advisors, Vanguard Group and Blackrock today now yield considerable influence on corporate America. These funds today influence anything from who sits on the board of the largest corporations in America to corporate policy practices on climate change, pay equality and woman board members. In fact, the considerable voting rights being held by these fund houses are responsible for spurring many of the positive changes that are happening in corporates across the world. These funds, thus, are participating actively to create investor as well as economic and social value while investing passively.
The United Kingdom in 2020 is all about to undergo a transition. The country has just pulled out of the European Union where it was a member nation for forty-seven years. The capital market of the country has been in a battered condition for a few years now. The extended periods of uncertainty and economic turmoil led to lowering of investor interest in the British stocks. This was exacerbated by international institutional investors also keeping out of the country. These institutions had a very significant role to play in making the United Kingdom an international financial destination. The result was that most of the stocks on the London Stock Exchange started to trend at massive discounts compared to their fair valuations.
Fund managers and other investors, through the understanding of the emerging value creation opportunity, waited for the situation to improve before risking any money. With the event of Brexit already past, green shoots in the British economy have already started appearing. Most of the international fund managers have now expressed their optimism on the improved prospects of investing in the United Kingdom. The equities on the London Stock Exchange look extremely cheap at this time and represent good buying opportunities for someone looking for long term value creation.
The circumstances in the United Kingdom for American Index tracking Investment management majors cannot be more conductive than this. Stocks of large, deep-rooted companies available at a discount is what these funds constantly look out for and invest in them for the longer term. This is the right opportunity for these companies to garner a significant stake on the companies listed on the London Stock Exchange and consequently into the corporate United Kingdom. Their increased participation in the capital markets of the country and its corporate boards will not only make them stronger but will also make the foundations of corporate United Kingdom stronger. Their long-term investment style will also help trading characteristics on the London Stock Exchange become less volatile and less susceptible to temporary adverse market conditions. These funds have also shown their class in the United States by staying away from short term market volatility driven money-making practices. These funds have brought shareholder wealth creation closer to the organic growth of the business they invest in, like never before, which in the long run will only benefit investors and businesses in the United Kingdom.
Active style of investing, more often than not, tries to take advantage of temporary market imperfections to make short term gains. The practice though having the potential to bring about windfall gains is also susceptible to windfall losses. Moreover, the expensive active management tools employed by these funds also entail that they must perform consistently well so as to be able to cover their costs before being able to provide any positive returns at all. These types of funds, though helping in bringing down the volatility by extinguishing temporary market imperfections, are also known to cause large market volatility caused by the abrupt movement of large funds. Plus, the recent case of Woodford Fund Management also brought to the fore the dangers of personality led investment culture which not only leads to massive erosion of investor wealth but also showed the blatant disregard these personalities could have for market regulations. If the capital market in the United Kingdom have to become more strong, mature and make its foundation stronger as it tries to rebound after Brexit, it has to forego such practices and adopt new and mature practices. The culture and practices that Blackrock, Vanguard and State Street are bringing in with them will benefit the United Kingdom in the long run.
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