Transcript: There’s active interest in passive funds

This is an audio transcript of the FT News Briefing podcast episode: ‘There’s active interest in passive funds’

Marc Filippino
Good morning from the Financial Times. Today is Thursday, January 25th and this is your FT News Briefing.

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Boeing just got hit with another setback. France is asking the UK to bail out some of its nuclear power projects, and Donald Tusk is taking on Poland’s president. Plus, everybody just sit back and relax — passive funds are taking over. I’m Marc Filippino and here’s the news you need to start your day.

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The US Federal Aviation Administration said late on Wednesday that it’s blocking Boeing from expanding production on its 737 Max planes. The regulator said it won’t agree to production requests from Boeing until quality control issues are resolved. The announcement comes after a door panel of one of its planes blew out in the middle of a flight earlier this month. The FAA has already grounded all of Boeing’s 737 Max 9 jets. The ongoing issues with the Max are a huge problem for Boeing. It’s the aircraft maker’s most popular model, and the company had planned on boosting its production. Boeing share price sank 2 per cent in after-hours trading yesterday. It’s down 14 per cent since the mid-air blowout.

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France’s electricity operator has run into a huge budget hole for nuclear power projects that it’s building in Britain. The French government is now asking the UK to help fill that multibillion-pound hole. And the request isn’t expected to go over well. The UK promised this week to pump £800mn into one of the projects, but said it would not put any more money into the other. And to make matters worse, sources say it will be hard to find private investors.

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Poland got a new prime minister late last year and, boy, it has not been a walk in the park for him. Donald Tusk has been in a very public fight with the country’s president, Andrzej Duda. Tusk said that Duda is responsible for allowing the previous rightwing Law and Justice government, known as PiS, to abuse power. You know, things like packing the courts, the state media and other institutions with loyalists. Now Tusk is working to walk all that back.

Andrzej Bobiński
I’d venture an opinion that probably this is the biggest change of guard since 1989 in Poland.

Marc Filippino
That’s Andrzej Bobiński, the managing director and political analyst for the Warsaw-based think-tank Polityka Insight.

Andrzej Bobiński
I mean, it feels as if pretty much everyone I know is getting a phone call and is being called up to go into government or the state or companies or state media, et cetera. So there is this feeling that there’s a huge change also because of the fact that PiS does away with civil service. So now there is a dire need to find new people who will work and run things in government.

Marc Filippino
Tusk’s first battle was with the state television station. He called it a mouthpiece for Law and Justice or PiS, and quickly took broadcasts off the air. Duda retaliated by calling the move unconstitutional. Bobiński thinks the station has improved, but it’s still not independent.

Andrzej Bobiński
Under PiS, the state-owned media (inaudible), the Polish television, was basically propaganda on steroids. Whereas now, what we can safely say is that it’s pretty boring, and it definitely doesn’t play to the emotions of the voters the way that the previous programs and broadcasters and journalists used to do so. So there is a huge change. I’d say that at the end of the day, it’s a change for the better. But have we come to this place where we’re ready to have an impartial, state-owned media? I don’t think so.

Marc Filippino
But the brawl over the television station was just the beginning. Tusk has his sights set on more reforms.

Andrzej Bobiński
I think that basically over the next six months, so up to the European elections, we’re going to see this fight over various institutions. But I feel that this fight is working for Donald Tusk because it’s uniting his coalition parties, it’s uniting his party, and it’s keeping voters focused on, you know, the issues.

Marc Filippino
And Bobiński says that it’s not just Polish voters who are backing Tusk. It’s EU leaders, too. Tusk really supports the bloc. After all, he used to be president of the European Council.

Andrzej Bobiński
I think a lot of people in Europe are looking at Donald Tusk with a mixture of hope and awe, maybe, because it feels as if he’s a liberal populist who is able to defeat the illiberal populists. He’s done something that nobody in Europe has done thus far. And also it feels as if he’s defeating these populists with their own medicine. So I think a lot of people are really rooting for Donald Tusk and for this government and are watching what’s happening, also thinking about the future and thinking about various situations in their countries.

Marc Filippino
Andrzej Bobiński was talking to the FT’s Europe editor Ben Hall in this week’s Rachman Review podcast, which is out today. We’ll put a link to the discussion in our show notes.

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Israel’s military is creating a buffer zone inside Gaza. The hope is that it will prevent another major attack by Hamas. The Israel Defense Forces are knocking down buildings near its border to enforce that buffer. They’re doing this even though the US has warned Israel not to shrink Gaza’s territory in the long term. Israeli forces have killed more than 25,000 people since Hamas’s October 7th attack. That’s according to Palestinian officials.

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Passively managed mutual funds and exchange traded funds are having a moment in the US. For the first time ever, they’ve amassed more money than their actively managed counterparts. Here to explain why is the FT’s Will Schmitt. He’s our ETF reporter. Hi, Will. 

Will Schmitt
Hi, Marc.

Marc Filippino
All right. So first of all, what’s the difference between a passively and an actively managed fund.

Will Schmitt
Kind of depends on who you talk to you. But generally speaking, passive funds are nearly synonymous with index funds. Somebody picks a basket of stocks like the S&P 500, for example, and then they build a fund to track those stocks. And they don’t make any choices beyond that. They just make sure the weightings are right and they’re buying and selling the right things to keep everything equal. All fine and good. Actively managed stocks are kind of what they sound like. Somebody thinks they have an investment thesis of these stocks will outperform, they’re a particularly good investment for whatever reason. And they fill up their mutual fund or ETF accordingly.

Marc Filippino
So then why have passive funds become so popular?

Will Schmitt
Well, historically, active funds have a tough time beating the market. It goes back to the conventional wisdom about don’t try to be sleek and time the market. At the same time, passive funds are generally less expensive. So the ability to not lose money and pay less appears to be enticing.

Marc Filippino
Are there any drawbacks, then, to going so hard into passive funds?

Will Schmitt
Not yet. There are some worries that if passive funds become too prominent, then they could have some negative ramifications in the market. There’s something about having active managers trading and buying stocks that keeps the market going. That said, we’re not there yet, and it’s important to note that this milestone is just for the mutual fund and ETF industry. When you factor in alternative investments like private equity, private credit and infrastructure, active investing still has a sizeable lead. I believe it’s about 70 per cent of the market.

Marc Filippino
Yeah, so I don’t mean to rile up our listeners, especially those who are fund managers, but does this popularity in passive funds make active management, active asset managers obsolete?

Will Schmitt
I don’t think it makes them obsolete. But what could happen is if you have a world where active is increasingly in competition with passive and increasingly struggling to outperform, you could see what we call fee compression, which has happened big time in the passive industry. It’s where one asset manager drops their fee to undercut their competitor by a couple of basis points, and then the competitor responds by going even lower and lower and lower and so on and so on. Active management is a real moneymaker because you can historically charge substantially more than you can for a simple, plain vanilla index fund. So in the sense that it could make it tougher to make money, that’s a problem. But I don’t think it makes active managers obsolete.

Marc Filippino
Will Schmitt covers ETFs for the FT. Thanks, Will.

Will Schmitt
Thanks, Marc.

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Marc Filippino
You can read more on all of these stories at FT.com for free when you click the links in our show notes. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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