The mounting cost pressures on advisers coupled with a lack of faith in active management have helped fuel the rise in popularity of passive funds, according to experts, as passive funds topped the sales charts in Q3.
The Pridham Report, published yesterday (November 4), showed the most popular fund houses for both gross and net retail sales of UK funds in the three months to September 30 were two of the main passive fund providers — Legal & General IM and BlackRock.
BlackRock topped the charts, with £1.7bn of net inflows in Q3, a notable way ahead of its biggest rivals LGIM and Royal London Asset Management, which received £886m and £666m respectively.
| Top 10 managers by net retail inflows in Q3 (£m) | ||
| 1 | BlackRock | 1,706 |
| 2 | LGIM | 886 |
| 3 | Royal London | 666 |
| 4 | Baillie Gifford | 627 |
| 5 | Liontrust | 512 |
| 6 | Fidelity | 374 |
| 7 | Rathbones | 321 |
| 8 | Allianz | 263 |
| 9 | Fundsmith | 196 |
| 10 | HSBC | 196 |
Although BlackRock was mainly boosted by flows into its passive funds, the report noted the fundhouse had also seen its actively managed fund sales rise and in particular, the European Dynamic and Absolute Bond funds.
But the majority of LGIM’s new business flows were into pure passive funds and its ‘actively managed’ Multi Index funds — funds which are actively invested into passive indexes.
According to the report, cost pressures on advisers — as the fundhouse, platform and adviser increasingly fight for a share of the client’s fee — were helping to drive the passive business.
On top of this, it noted the negative publicity surrounding Neil Woodford and the closure of Woodford Investment Management had made advisers and investors more risk averse.
Advisers agreed that in general the profession was more focused on the cost of an investment to improve returns for their clients and in some cases themselves.
I think there is a general trend towards passive funds which is partly driven by cost pressures but mostly by the realisation that many active managers just don't perform over the medium to long term in major marketsDarren CookePeter Chadborn, director at Plan Money, said: “I do believe that an increased drive towards passive business is being influenced by advisers focusing on cost and a greater appreciation of what clients value in their relationship with their adviser.”
He said as reducing the total cost of an investment was the greatest determinant to long-term returns, coupled with the fact the majority of clients had very little interest in the mechanics of actively managed portfolios, passive investments had a role to play in his offering.
David Hearne, director at Satis Wealth Management, agreed, adding that some advisers were probably recommending passive funds to drive down their clients' costs in order to justify a higher share of the total cost for themselves.
He also thought it was understandable some advisers would recommend passive funds following the Woodford saga as they didn’t want to be caught on the “wrong side of a failed recommendation”.
Director at Perceptive Planning, Phil Billingham, agreed. He said: “The evidence is that paying higher fees [for actively managed funds] does not actually get the consumer any additional benefits.
“There is also the very real attraction that with passive funds, you are much less likely to have repeats of active managers going ‘off piste’ and buying toxic assets, or leveraging the fund. See Mr Woodford for an example.”
He also thought the costs played a role for advisers, noting if active managers could lower their fees to retail investors “we may see a different picture.”
Darren Cooke, chartered financial planner at Red Circle Financial Planning, agreed, adding: “Some will do, but picking those few is all but impossible in advance and even then star managers can come crashing down as we have seen recently with Woodford.”
imogen.tew@ft.com
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