Tracker funds are on course to account for more than a third of total net retail fund sales this year after another surge in the products’ popularity, new figures show.
Investment Adviser analysis of statistics released by the Investment Association (IA) last week show UK-domiciled tracker funds had accounted for 36.4 per cent of 2015’s retail fund sales by the end of August.
The figure underscores a sharp growth in the adoption of trackers in recent years.
Tracker funds accounted for 16.2 per cent of total retail sales in 2013, but that proportion rose to 22.5 per cent last year and appears set to increase significantly once more. Notably, IA’s figures do not include exchange-traded funds, which also have a sizeable presence in the passives market.
Last month was particularly successful for the sector, aided by paltry mixed-asset fund flows and outflows from bond portfolios – two areas where tracker funds have little penetration.
In total, tracker funds accounted for 75 per cent of the £690m in net retail sales seen in August.
But some have speculated this may in part be due to investors making tactical plays during market volatility.
Nick Sketch, senior investment director for Investec Wealth & Investment, said there was not enough information to draw conclusions from the one-month figures, but suggested: “People perceive passives to be lower-risk options, even when the numbers don’t tell you that. You might well take the view of using a passive product in order to ‘rent exposure’ [to an index].
“Then [only after that] you will sort out what your active positions will be.”
Neil Cowell, head of retail sales for Vanguard Asset Management, also argued that passives were seen as a safe-haven investment in August.
“The percentage passives represented [in August’s inflows] was at least in part influenced by people looking at market volatility or worried about interest rate movements.”
Others suggested that passives’ popularity could be curtailed if market volatility continues. Choppier waters are often viewed as a better environment for active managers to outperform their passive peers.
Meena Lakshmanan, partner and head of investment solutions at Vestra Wealth, said: “August was really important. So far we have been in a bull market. It has been looking like a one-way flow and now it’s going the other way, with all these dislocations. This is when opportunities [for active managers] come in.”
As a proportion of total assets, tracker funds still have some way to go to eclipse active products. Passives’ total market share has been rising at a rate of around one percentage point per year, and stood at 12.2 per cent as of August 31.
The cost of greater market share
The growth of passives has come at a cost to providers, according to ratings agency Moody’s. In its October ‘Credit Outlook’ statement, the firm said the price war was “credit negative” for companies operating in the space.
Last month Fidelity became the latest firm to cut charges on its tracker fund range, following similar salvos from BlackRock, Legal & General Investment Management and Vanguard over the course of the past 12 months.