InvestmentsSep 17 2014

IMA figures raise doubts over passives’ popularity

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In its landmark annual report, fund management trade body the IMA has cast doubt on the belief that passive investing is exploding into the UK mainstream.

The proportion of industry money invested passively rose to 22.3 per cent by the end of 2013 – only slightly higher than the 21.9 per cent figure reported last year.

The figure is only marginally higher than the 22.1 per cent proportion observed at the end of 2011.

The IMA said that while the proportion of passive assets had grown gradually from 17 per cent in 2006 to 21 per cent in 2010, it had remained “broadly stable” ever since.

The findings were revealed in its 2013-14 asset management in the UK survey, based on responses from 72 of its member firms, responsible for £4.3trn of UK-based assets.

The result appears to contradict the widespread belief that investors are flocking into passive investments – that is, funds that simply track the performance of a benchmark index, rather than aiming to make selective ‘active’ investment choices to try to beat the broader market.

Many commentators have warned that the comparative cost of active fund management will increasingly see it lose ground to passive investing, since investment cost has come under the spotlight in recent years.

They cite the fact that active fund managers tend on average to underperform the market because of their fees, and the fact that betting against the stockmarket is a ‘zero-sum game’ – meaning some will always underperform.

A recent report from the Cass Business School argued that active fund management ‘talent’ is impossible to identify reliably.

The IMA report admits that the trade body does not collect full data about investments in exchange-traded funds, a type of passive investment that is believed to be growing rapidly.

The report does, however, include responses from firms that specialise in passive investing such as US-based giant Vanguard Investments.

“Whilst we do not capture the full ETF market in our data, there is evidence from the UK institutional market that this stabilisation is reflected in occupational pension scheme allocations,” the report says.

However, the IMA also admits that a number of factors do suggest that passive investing will flourish in the UK.

These include financial regulators’ recent Retail Distribution Review (RDR), which is leading to greater transparency in fund management costs and performance.

“The combination of the RDR, changes in adviser approaches in fund selection and greater availability of passive funds is widely expected to result in greater selection of the latter, with increased margin pressure on active managers,” the report says.

Passive fund providers have been engaged in a price war in recent months and the cost of some index-tracker investments has fallen to near-negligible levels.

Vanguard recently cut the ongoing charges on a total of 25 passive funds, in response to a similar move by Fidelity. Both now offer tracker funds for as little as 0.07 per cent a year.