Passively we roll along
While the current market turbulence means outflows from active fund houses have become as commonplace as industry award events, we thought we would take a bit of a peek under the bonnet of DFMs' passive exposure.
The most widely owned passive instrument among the DFMs on our database is Fidelity US Index, which is held in 12 portfolios.
But this fact alone is somewhat deceptive because all the sectors with the highest proportion of passive holdings are bond sectors.
Indeed the only sector of our database where all holdings are passive is US Treasuries. The next highest is gilts where 81 per cent of holdings are passive.
The most popular passive bond mandate is L&G Sterling Inflation Linked Gilt Index, which appears in nine DFM portfolios and is the second most popular passive fund overall.
The least popular sector for passives (excluding those areas where there are no passive holdings such as direct property) is UK equity income, where only 1 per cent is passive thanks to one brave DFM's holding in Vanguard FTSE UK Equity Income Index.
We also had some informal chats over the canapes with a number of DFMs to discover what they look for in a passive product.
The number one consideration which concerns DFMs is tracking error: they want exposure to an index, not something which is almost exposure to an index.
The second consideration was liquidity and the risk associated with the provider’s own solvency.
Our database shows relatively little take-up yet among DFMs for some of the more esoteric passive instruments which have come to market in recent years. The most widely held of those on our database is probably the L&G Global Real Estate Dividend Index, which is owned by seven of the DFMs on our list.
Currently only 32 per cent of listed property holdings are passive.
