Rise in tracker funds linked to RDR by L&G

IMA data showed that sales jumped to £1.9bn in 2011, up from £1.7bn in 2010, while funds across all sectors saw a fall in net retail sales to £18bn from £29.3bn.

Funds under management in tracker funds also grew to their highest on record to £39bn in 2011 from £38.3bn in 2010. In contrast funds under management across all sectors fell to £571bn from £586.5bn.

The passive sector’s share of total funds under management was also the highest on record at 6.8 per cent.

Richard Saunders, chief executive of the IMA, said: “Last year was successful for tracker funds. Funds tracking equity indices accounted for 8 per cent of total equity fund sales, the highest level since 2003.”

Simon Ellis, managing director of Legal & General Investments, said in the past three years the company had experienced a strong increase in demand for passive investments, notably from fee-based advisers.

He said it was “no surprise” the trend was gaining momentum in the run-up to the retail distribution review as investment companies will have to be far more transparent about fees.

Earlier this year the growth of L&G’s passive business led it to cut charges on some of its institutional unit classes.

UK, single market and regional index funds now have an annual management charge of 0.20 per cent and global funds have an AMC of 0.30 per cent.

Mr Ellis said: “This simple charging structure will give advisers low-cost and high-quality index funds that offer good value when constructing client portfolios.”

Tim Purdon, managing director of Ayrshire-based Paladin Financial Services, said: “I am more in favour of active management, although you have to question how well the funds have performed relative to fees they charge in comparison to passive funds. We may well want to move client funds in that direction in due course.”

He highlighted the importance of choosing funds for performance, rather than cost, and the danger of do-it-yourself investment, which he says could be driving the trend towards passive funds.

Mr Purdon added: “Cost is not everything. A tracker fund is great when the market is going up, but not so good when the market is going down or volatile.

“We may find more do-it-yourself investing going on as RDR approaches. That concerns me because more people are likely go down the passive route to cut costs instead of choosing an adviser.”