InvestmentsMay 5 2015

The growing popularity of passives

      pfs-logo
      cisi-logo
      CPD
      Approx.0min
      pfs-logo
      cisi-logo
      CPD
      Approx.0min
      twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
      Search supported by
      pfs-logo
      cisi-logo
      CPD
      Approx.0min
      The growing popularity of passives

      The debate between active and passive investments has been growing over time with some investors slowly turning to the latter in order to avoid the hassle of picking funds and paying hefty fees to traditional fund managers. But those going down the passive route could still face a lot of challenges.

      In a passive fund, the manager makes only minor periodic adjustments to keep the fund in line with its index. These are typically established indices such as the FTSE 100 or FTSE All-Share although funds can be based on market sectors such as technology, healthcare, financial markets or commodities.

      Table 1 shows a list of the indices with most passive funds tracking the market with the upper half of the data hugely dominated by FTSE indices. The list is led by the FTSE All Share Index with 24 trackers offering a fair choice to investors.

      Passive funds have become very popular in the past few years, especially with investors realising that finding an active fund manager who can consistently beat the market can be a huge challenge. Index funds generally tend to have lower fees and operating expenses compared with active funds. Since they run on algorithms, they don’t need to employ a fund manager and thus turn out to be cheaper than their active counterparts.

      “We have definitely seen the cost of investing fall a lot from last year, says Adam Laird, passive investment manager at Hargreaves Lansdown. Tracker funds are attracting more investments especially because the charges are sometimes as low as 0.1 per cent.”

      Passive funds are also extremely easy to set up. A number of DIY platforms are very user-friendly and easy to manage for a first-time investor. These platforms offer step-by-step help and advice for investors making it easy for them to invest their money.

      “Research has shown that investors do have more choice than ever before, Mr Laird says. “More and more products are launched using creative indices and investors have a lot more flexibility when deciding to invest.”

      Are low cost funds better?

      Recent research from Vanguard says the theory behind indexing as an investment strategy is derived from a zero-sum game: before costs, for every investment that outperforms the index of a chosen market, there has to be another that underperforms. But once costs are taken into account, more than half of the investments underperform. The report goes on to say that low-cost funds will have a greater probability of outperforming higher-cost funds. The lower average cost of index funds places them at an advantage in this regard.

      PAGE 1 OF 6