Danish households who invested in global equity funds received almost the same return in both active and passive funds in the first quarter of 2023, according to a report by Danmarks Nationalbank. The report stated that Danish households received a return of 5.2 per cent before costs in funds that invest in global equities. The return was 5.1 per cent in actively managed funds, while it was 5.6 per cent in passively managed funds, indicating a small difference in returns for active and passive management.
Global equity funds typically have a benchmark for global equities such as the market index MSCI World, and they are the most popular equity funds among Danish households. They account for around three quarters of the total wealth of households in equity funds, with kr. 143 billion invested.
Most of the wealth in global equity funds is actively managed, while 17 per cent is passively managed. Inflows into passive funds have increased since the start of 2018, where only 7 per cent were passively managed. In passive funds, the returns follow the returns of the chosen benchmarks, while active funds aim to achieve higher returns than the benchmarks. Therefore, investments and returns will differ from those of the market indices in active funds.
Active managers can adjust the composition of the investments such that it differs from the composition of their chosen benchmark. The managers can change the weighting of individual investments in their portfolios. This gives a larger variance in returns across actively managed funds compared to the passively managed funds because the active managers can have different strategies.
The report also mentioned that there is a difference in costs between the two types of management. The annual costs percentage is typically 1.5 per cent in actively managed funds, while it is 0.5 per cent in passively managed funds, with the largest variance in costs in actively managed funds.
Danish households who invested in global equity funds received positive returns in the first quarter of the year with little variance across funds. The report was based on time-weighted returns before costs on Danish households’ wealth in equity funds, which have at least 80 per cent exposure in global equities.