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Note from the editor - 7 December

Glenn Freeman  |  07 Dec 2019Text size  Decrease  Increase  |  
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Australian exchange-traded funds chalked up another record period and are on track to hit $60 billion by the end of this month.

The naysayers of passive investing have been vocal for some time – and there's no surprise that some of the loudest critics are those spruiking actively managed funds. One of the most famous, thanks largely to his cameo in Hollywood blockbuster The Big Short, is Michael Burry.

But I was this week reminded of a few aspects of the debate by fund manager Stephen Hiscock, who highlights some of the risks of booming passive investment.

Particularly given the burgeoning focus on ESG considerations in investing, it's interesting to note that ETFs rarely vote on proxy matters for any of the companies in their extensive portfolios.

But perhaps of bigger concern is that they don't participate in IPOs. As Hiscock pointed out, the distortion we're seeing in the number of passive products versus active funds is drying up sources of capital in the market.

Morningstar's Peter Warnes alluded to this in his Your Money Weekly column, in calling out what he sees as an asset bubble. He asks whether buyers are being "blindsided or hoodwinked into thinking they're getting good value because the yield is more appealing."

Along similar lines but from a different angle, contributor Anna Fedorova argues that abandoning active funds in favour of ETFs could even be dangerous for investors.

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In a different part of the listed universe, Morningstar and Firstlinks editorial director Graham Hand raises concerns about the underlying assets of some fixed income LICs and LITs emerging in Australia. Seeking to exploit a shortage of yield opportunities, he suggests some of these vehicles aren't fit for the market at which they're targeted, quoting a prominent local fund executive who said such "high-risk asset classes do well until they don’t."

Small cap funds were placed under the microscope in this week's Fund spy, where I unearthed those that have managed to deliver the most impressive turnarounds since the "quarter from hell" markets rode through in the back-end of 2018.

Turning from funds to individual stocks, Australia's supermarket landscape is evolving, just as other parts of retail are changing forever as Amazon and other disruptors eat into margins.

The near-duopoly of household names Woolworths and Coles has been slipping in recent years, as Morningstar's Johannes Faul explains. And though the market doesn't seem to have accepted the inevitable just yet, he thinks it's unlikely they'll ever again attract the types of profit margins they once did.

Another household name, fuel distributor Caltex, featured on Morningstar.com.au this week as it rebuffed a takeover bid from a Canadian entity.

Caltex management said the $8.6 billion offer undervalued the business and doesn't offer value to shareholders.

On the more technical front, actuarial specialist Melanie Dunn this week discussed retirement income and how much is enough. It seems the bulk of SMSF trustees are set for at least adequate cash piles upon retirement, if the Accurium study quoted is any indication.

And as the end of the year draws ever-nearer, Emma Rapaport asked Fidelity's Anthony Doyle if he thinks a Santa rally for markets is likely. At risk of spoiling the surprise, he predicts a merry Christmas for investors.

is senior editor for Morningstar Australia

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