Investments  

Closet index funds push investors towards passives

Closet index funds push investors towards passives

Funds charging active fees but holding assets in much the same way that passive funds do is a bugbear for UK investors, research from Naxitis Asset Management has revealed.

Among UK respondents, 64 per cent of UK investors said they expected their mutual funds to have portfolios that differ substantially from their benchmarks, but 82 per cent cite the prevalence of closet indexers who charge active fees while really just tracking an index.

Natixis survey last year showed 57 per cent of institutional managers and 43 per cent of financial advisors cited the prevalence of closet indexers as a reason they used passive strategies.

Paul Stocks, financial services director at IFA firm Dobson and Hodge in Doncaster, said: “Passives are a bit of a bug bear for me – I hear a lot of bluster and some saying they’re the only way to invest but many seem to ignore some key points or set the ‘goal’ for actives to meet at a level which is not achievable.

"We do, however, use Vanguard Lifestrategy simply because it brings in diversification whilst trimming a bit of cost off the portfolio with reasonable net returns and an ability to tap into the strategy most suited, risk wise. 

"Having said that, if it was all or nothing, there are other multi-asset strategies I prefer but we don’t put all of our eggs in one basket.”

The survey comes after Fundsnetwork platform showed that a pair of passive funds were more popular, in sales terms, than any individual active funds in August.

The most popular active fund, in terms of sales, on the platform was the £4.2bn Lindsell Train UK Equity Fund, which is run by Nick Train.

Mr Train is known, across the different mandates he runs, for having very concentrated portfolios, which, in the UK fund, shun such large index constituents as the oil, mining, banks and pharmaceuticals.

The top 10 holdings in the Lindsell Train UK Equity fund account for 78 per cent of the capital deployed.

The sector most popular with advisers in August was multi-asset, with the IA Mixed Investment 20 to 60, and 40 to 85 per cent shares sectors topping the charts.

Paul Milburn, investment manager at Lowes Asset Management said: “We allocate to multi-asset funds within some of our lower risk model portfolios.  

"By doing so we hope to benefit from the tactical asset allocation decisions which managers may make during different periods of the investment/market cycle.  

"Multi-asset funds can also provide a further level of diversification within our own model portfolios, particularly those which invest in what we would call more esoteric investments which we wouldn’t or possibly couldn’t allocate to directly ourselves.  

"When selecting multi-asset funds we therefore look to ensure that they offer at least one of these benefits.”

david.thorpe@ft.com