Tracker surge continues despite volatility

With risk assets suffering markedly in the opening month of the year, some fund houses have been making the case for active management as a means of protecting portfolios.

In spite of this, fund flows in January reflected a significant interest in passive solutions and the worst net outflows for active funds since the financial crisis.

Morningstar estimates show three trackers among the top-10 vehicles in terms of net inflows at the start of the year, with the £4.2bn Royal London FTSE 350 Tracker fund placed second on the list.

Meanwhile, the 10 funds suffering the biggest net outflows for the month were all actively managed. Analysts believe that investors could be turning to passives for lower-risk tactical moves.

Rob Morgan, pensions and investments analyst for Charles Stanley, said: “In January a lot of people perhaps instinctively thought, ‘the market is falling and now is the time to get involved. Perhaps I will follow the market bounce’.

“With a passive you know there is a very small margin of error,” he added.

“A falling market is a chance to top up, so people can buy a passive and then refine that [position] at a later date. The most important thing is to get their tactical asset allocation right – a passive can do that and you need to do the minimum amount of research.”

Guy Stephens, managing director of Rowan Dartington Signature, said: “My hunch would be that contrarian investors are positioning for a rebound in the FTSE 100 index, which dominates tracker funds and has been impacted this past year by the sell-off in oil and commodities relative to small and mid caps.

“Buying a tracker still gives you diversification but is a play on this rebound without buying a dedicated commodities fund, which would be much higher risk.”

Trackers racked up £543m of net retail inflows in January, Investment Association figures show, while UK funds suffered an overall net outflow of £463m, marking their worst month since October 2008.

Tracker funds represented 12.4 per cent of total funds under management in January, up from 11.2 per cent in the previous year.

The products’ share of total UK retail fund flows has jumped significantly in the past few years, culminating in trackers accounting for roughly a third of net retail sales in 2015.

But the reasons behind January’s buying activity are complicated by the fact that the trade body’s statistics do not include exchange-traded funds (ETFs) – typically the way in which investors seek to gain tactical, passive exposure to markets.

“You do sometimes see increased use of passives, particularly ETFs, around periods of market volatility, as those investors who tend to be fairly active will use ETFs to quickly reflect an asset allocation decision,” said Ben Seager-Scott, director of investment strategy at Tilney Bestinvest.

“For example, investors who think a market has been oversold might look for quick exposure to a broad asset class.”

Mr Morgan noted that the continued popularity of tracker funds could also be a sign of indecision. “A lot of people buy passive funds when they can’t decide what to buy,” he said.