Australia is known as a country where people enjoy a punt. The latest data confirms that this openness to risk and reward also extends to the sharemarket.
The ASX last week released a study that found Australians were among the most likely in the world to own shares outside of superannuation, with 39 per cent of adults holding either shares, exchange-traded funds (ETFs) or other listed investments. This is one of the highest proportions among developed markets, and ahead of economies such as the UK and Germany.
However, there’s been a major change in how people buy shares – and that’s sparked debate over whether our market is becoming more prone to wild swings, or even the risk of bubbles.
ETFs are hugely popular, with good reason. ASX’s data, based on a survey of almost 4500 people, underlined the surge in people who are investing via ETFs, a type of listed fund that gives people a small piece of a wide range of shares, such as the ASX 200 index. The exchange operator estimates about 2.8 million Australians own ETFs, and that the number has roughly doubled since 2020.
Australia’s ETF industry is managing about $388 billion, figures showed last week, and that number will probably soon hit $400 billion as more people pour money into the products.
For the individual investor, there are plenty of reasons why putting your money into an ETF makes sense. Their fees are much cheaper than paying fund managers who’ll try to beat the sharemarket index, but in many cases will not. Trying to pick individual stocks that consistently outperform the wider market is notoriously difficult.
Even so, the industry’s rapid growth has sparked an interesting discussion in finance circles.
Some maintain that the sheer volume of money pouring into “passive” investment funds is distorting the wider sharemarket, and contributing to a market that’s more prone to bubbles or irrational investing.
It’s a debate playing out across the market, but you can see the major changes in the ownership of Australia’s biggest banks, which are four of the largest companies on the ASX.
Jarden, an investment bank, last week pointed to a “sustained and dramatic” change in the share registers of banks, as “mum and dad” investors play a smaller role and passive funds (including super money) step in.
Jarden analyst Matthew Wilson says the rise of passive investing could leave the market more exposed to the risk of bubbles because there’s a certain herd mentality to how index funds work.
An ETF that targets the biggest companies in a sharemarket will buy more of its largest stocks, such as CBA or BHP, which then pushes up the share prices of these companies even higher.
“The more you buy, the more they go up, so the more you buy,” Wilson says. “You create this loop that feeds on itself.”
Wilson says the decline of active investment management – the so-called stock pickers – means there’s little in the way of “price discovery”.
This means the big passive investors buying shares aren’t spending the time to assess what the right value of a company is, based on its performance, management team or outlook.
“Are markets now fulfilling their original role of capital formation and allocation?” Wilson questions. He points to a “sustained and dramatic shift in major bank share register profiles” over the past three years, and says this surge in passive investing has stretched the “fundamental valuation” of CBA – which means the bank’s market value has become increasingly divorced from the company’s actual financial performance.
It’s also true that in recent times, wild moves in big companies’ share prices of 5 to 10 per cent have become more common when firms have market-sensitive news, such as a profit downgrade.
Some say these bigger swings are linked to the sheer amount of passive money floating around. It’s been argued the growing role of ETFs that automatically buy stocks simply because they’re in an index gives other short-term traders, such as hedge funds, an outsized influence on prices.
Others, however, refute the idea that passive money is distorting the market.
Chris Brycki, the chief executive of Stockspot – an online investment adviser that places customers into ETFs – argues that the rise of passive money has made life harder for professional investors, who used to benefit from less informed retail investors in the wider market (sometimes known as “dumb money”).
Brycki argues that so-called “dumb money” is now increasingly going into ETFs, which means investment pros have to compete more fiercely with each other based on skill.
“The ‘dumb money’ has all been sucked up by ETFs and now only the sharks are left at the poker table,” he says.
It’s a difficult debate to settle one way or the other, because proving what forces are driving the CBA share price from one day to the next isn’t really possible.
What is clear, however, is that the way Australians invest has changed significantly.
Instead of punting on a handful of individual stocks or trusting professional investors to find the most attractive shares, people are voting with their feet and putting their cash into passive funds, which spread their investments across entire market indexes or sector benchmarks.
While this may be distorting the sharemarket to some extent, it means retail investors today hold a much wider range of assets than they once did – and that’s surely a good thing.
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