Hargreaves Lansdown expects to see continued polarisation in the UK funds market over the next year, as the disparity between low cost passives and high quality active funds becomes clearer.
Laith Khalaf, senior analyst at Hargreaves Lansdown, expects investors to plump for low-cost passive funds at one end of the spectrum, or high quality active funds at the other.
These comments come as the Financial Conduct Authority has been cracking down on tracker funds that are disguised as actively managed portfolios.
Mr Khalaf admitted the days of closet trackers are numbered, but said there are still sufficient numbers of these funds out there, meaning this transition will take place over some considerable time.
The FTSE 100 wealth management firm also expects income to remain hard to find in 2017, advising investors to focus on the “levers” they can use to control their wealth.
Cash and bonds have been yielding very little over the past year, and Mr Khalaf said the difficult hunt for income is likely to become even more acute in 2017 as inflation “returns to the fray”.
He said the lower pound and higher commodity prices could push the real rate of return on cash into negative territory.
“This should be supportive of the stock market, which remains one of the few places investors can go to get a decent income, particularly with millions of baby boomers beginning to hit retirement and searching for a yield on their pension pot.”
The Hargreaves analyst advised investors to focus on ways they can control their wealth, namely saving as much as they can each month, investing in tried and tested fund managers, and making their portfolio as tax efficient as possible.
With elections in France, Germany and the Netherlands on the horizon, Mr Khalaf said there is “no doubt” these will cause wrinkles in the markets, given the potential for these votes to prompt referenda on EU membership.
“However this year has demonstrated the folly of predicting the outcome of political votes, not to mention the effect they may have on financial markets,” he said.
“The UK funds industry saw record levels of investor withdrawals around the referendum, yet the FTSE 100 has risen 10 per cent since the UK went to the polls.”
Looking at the fund management industry, Mr Khalaf pointed out that absolute return funds have plummeted to the bottom of the performance table, which he said does nothing to assuage concerns funds in the sector might not live up to their billing.
“While all three funds at the bottom of the table have better long term performance, the numbers show the journey to absolute returns can be anything but a smooth ride.”
|Worst performing funds of 2016||Total Return|
|FP Charteris Property||-7.70%|
|M&G Property Portfolio Sterling||-8.00%|
|AXA Framlington Biotech||-9.10%|
|Jupiter UK Growth||-9.10%|
|Franklin Diversified Growth||-10.70%|
|Invesco Korean Equity||-11.40%|
|Old Mutual UK Opportunities||-12.20%|
|City Financial Absolute Equity||-14.60%|
|CF Odey Absolute Return||-18.00%|
|FP Argonaut Absolute Return||-26.20%|
31st December 2015 to 14th December 2016
Elsewhere a couple of property funds find themselves near the bottom of the performance table.
This comes after a number of large property funds were forced to suspend trading, causing billions of pounds of investors’ money to be frozen in the investment vehicles.