Passive investing is now too important to ignore, investment experts have said, after one of the UK’s biggest wealth management companies introduced trackers on its list of recommended funds for the first time.
Last week (1 September) Hargreaves Lansdown took the plunge and added 13 index-linked tracker funds to its Wealth 150 Plus list, which is a selection of the company’s favourite funds.
Last year, the FTSE 100 firm was the second largest wealth manager by sales, and some financial figures claim this acceptance of passives on the list could further threaten the active management industry.
Tony Yarrow, founder of Wise Investments, said: “Clearly, passives are now too important for Hargreaves to ignore.
“This might be a turning point, or I would see it as more of a point in the evolution of markets, rather than the beginning of the end for active managers.”
The manager of the £53m TB Wise Income fund pointed out investors can have a relationship with an active management team which isn’t possible with a passive fund, adding the “novelty factor” of ETFs might wear off.
He also said passive investing is a “momentum strategy” where investors capitalise on market trends. “We have been in a momentum market post-crash, which has suited passives, but there are signs that this may be changing.”
Simon Torry, chartered financial planner at SRC Wealth Management, said the move signals an “inevitable” turning of the tide, adding Hargreaves are only responding to what has been a growing trend across the investment marketplace.
He pointed to his own firm’s research, which indicates the majority of active fund managers are unable to consistently beat their benchmark, and said SRC invests in low-cost tracker funds as a core part of a client’s portfolio.
“Over time I do expect trackers to form an increasingly higher proportion of client portfolios as investors put more faith in diversification to generate returns as opposed to stock picking.”
What I find slightly puzzling, is why it has taken so long to include tracker funds on the list Peter LowmanMatthew Harris, IFA and owner of Dalbeath Financial Planning, said the move was interesting, particularly because Hargreaves have been at the forefront of selling the idea that active managers are worth paying high fees for.
He said: “If the Wealth 150 starts to have a passive fund in each asset class then that certainly challenges that view.
“This in itself isn’t a big threat to active fund management, but it is another in a long line of attacks on it,” he said, adding he expects this to drive down annual management fees on active funds even further.
“The era of some funds charging 1.5 to 2 per cent each year must surely be drawing to a close, and this can only be a good thing for consumers.”
Peter Lowman, chief investment officer at the Investment Quorum, said he found it “slightly puzzling” it has taken so long for Hargreaves to include tracker funds on its list of recommended funds.
“Clearly there have been times over the past few years, and throughout the current investment cycle, when a passive strategy has been warranted.”
Mr Lowman disagreed the move signalled a dynamic change in the industry, and said perhaps it was more to do with the latest performances and cost ratios of funds, particularly in a time when performance and cost have come under some scrutiny in the active industry.
“The active management groups will be threatened, but competition is always healthy.
“It is also worth remembering that in times when the markets become very unfriendly, elite active managers tend to give an investor some support on the downside.”
A spokeswoman for tracker fund giant Vanguard said she expected adoption rates for ETFs to follow a similar trajectory in the UK as the US, where passives now represent 30 per cent of assets under management.
“There is also a growing appreciation that the vast majority of investors do not need complex and opaque products; they need straightforward, cost-effective solutions that will help them to reach their goals.”
But she said the passive versus active debate is over.
“It is tempting to pit one approach against the other, but most savvy investors no longer see these as two mutually exclusive ways of investing.
“Today, the more pertinent issue is that low-cost funds are overtaking high-cost funds as investors are voting with their pounds and showing a clear preference for low-cost funds.”
ANNUAL FUND CHARGES | |||
Standard ongoing charge | HL saving | Net ongoing charge (for HL clients) | |
BlackRock Corporate Bond Tracker | 0.17% | 29% | 0.12% |
BlackRock Emerging Markets EquityTracker | 0.25% | 8% | 0.23% |
BlackRock Japan Equity Tracker | 0.16% | 31% | 0.11% |
BlackRock Pacific ex Japan Equity Tracker | 0.19% | 26% | 0.14% |
HSBC FTSE 250 Index | 0.18% | 56% | 0.08% |
Legal & General All Stocks Gilt Index Trust | 0.15% | 33% | 0.10% |
Legal & General All Stocks Index Linked Gilt | 0.15% | 33% | 0.10% |
Legal & General European Index | 0.12% | 25% | 0.09% |
Legal & General Global Inflation Lnk Bond Indx | 0.27% | 37% | 0.17% |
Legal & General International Index Trust | 0.13% | 38% | 0.08% |
Legal & General UK 100 Index | 0.10% | 40% | 0.06% |
Legal & General UK Index | 0.10% | 40% | 0.06% |
Legal & General US Index | 0.10% | 40% | 0.06% |
Average HL saving | 32% | ||
Danny Cox, head of communications and chartered financial planner for Hargreaves Lansdown, said previously the Wealth 150 list was just an actively managed list, and the decision to also include passives was down to the big increase in the number of people using passive funds.
He said: “We have been highlighting tracker funds for a number of years now through our Core Tracker List, the recent change is simply to move these funds onto the Wealth 150 Plus so investors can consider active and passive funds side by side.”
katherine.denham@ft.com
