Around £57.4bn worth of investors’ money is now in passive funds – an increase of £15bn over the last 12 months.
Total funds under management
| |
2012 | 2011 |
|---|---|---|
| Tracker funds | £57.4bn | £42.3bn |
| All funds | £658bn | £576bn |
Source: FE Analytics
Nick Blake (pictured), head of retail at Vanguard Asset Management, says the results reflect the start of a long-term change in the way people invest.
"Retail investors, it appears, are starting to work out what institutional investors have known for some time; that passive (or index) investments offer a low-cost and valuable way of capturing market returns once the asset-allocation decision has been made," he explained. "The argument that the increased adoption of passives is merely a reaction to the arrival of transparent fee-based advice is still good news for investors, but it also does a disservice to those who have come to understand the role that passive investments can play in effective financial planning."
"More advisers are realising that their added value comes from financial guidance and mentoring, not trying to second-guess the fund industry's future winners. As such, they anchor their client's goal with sound planning, appropriate risk strategies and well balanced, diversified asset allocation."
"They then let low-cost index funds and time do the 'heavy lifting'."
Patrick Connolly, head of communications at AWD Chase de Vere, believes it is a good idea to hold trackers to capture exposure to certain areas of the market – but not all.
"It isn’t a great surprise and I think it is part of an ongoing trend," he said.
"It wouldn’t be a shock if in 2013 the amount of money in passive investments will, again, go up substantially."
"There is, and has been, a realisation on the part of both investors and advisers that it is very difficult to find managers that can add value in certain areas of the market."
"Therefore, trackers are a sensible alternative as they give you exposure to a desired market but have, broadly speaking, lower charges than active funds."
In a recent FE Trustnet article, Hargreaves Lansdown’s Adam Laird showed how investors can build a portfolio that combines both passive and active funds in order to maximise efficiency.
According to FE data, there are a number of multi-billion pound tracker funds available to retail investors.
These include the likes of Vanguard Emerging Market Stock Index, L&G UK Index and the Royal London FTSE 350 Tracker.
Largest tracker funds
| Name | Fund size (m) |
|---|---|
| Vanguard - Emerging Markets Stock Index | 4,400.1 |
| BlackRock - CIF UK Equity Tracker | 4,057.2 |
| L&G - UK Index |
4,012.3 |
| Royal London - FTSE 350 Tracker | 2,978.4 |
| Virgin - UK Index Tracking |
2,032.2 |
Source: FE Analytics
The largest of these is Vanguard Emerging Markets Stock Index.
The fund sits in the IMA Global Emerging Markets sector and has £4.4bn worth of assets under management. It was launched in June 2009 and aims to track the performance of the MSCI Emerging Markets index.
It has a high minimum investment, but is available for a more reasonable price on a number of platforms.
Since its launch, Vanguard Emerging Market Stock Index has returned 61.71 per cent while its benchmark has returned a slightly higher 64.08 per cent.
Performance of fund vs index since June 2009
Source: FE Analytics
Over three years, the Ireland-domiciled fund has a tracking error of just 4.29 per cent in relation to its index.
It has a total expense ratio (TER) of 0.55 per cent.
The largest UK-focused passive fund in the IMA universe is the £4bn BlackRock CIF UK Equity Tracker.
The fund was launched in 2005 and has performed well since this time. Over five years, it has returned 34.05 per cent. This marginally beats the FTSE All Share – the index it tracks – which is up 33.9 per cent.
However, its tracking error is quite high over five years, at 8.72 per cent.
The fund has a TER of 0.22 per cent. It requires a minimum direct investment of £100,000, however once again this comes down significantly for anyone investing through a platform.
For investors looking for cheap UK mid cap exposure, the largest fund is Royal London’s FTSE 350 Tracker. The £2.9bn fund has a TER of 0.55 per cent and has tended to outperform the FTSE 350 index since its launch in July 2007.
It has returned 34.67 per cent over five years while the index has made 34.01 per cent and the sector is up 31.79 per cent.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
However, Royal London FTSE 350 Tracker has a relatively high tracking error over this period, at 9.32 per cent.
The fund has a TER of 0.12 per cent.