DIY investors shun passives as advisers dominate index market

adviser-clients

Advised investors continue to dominate the passive market, despite claims the costs of accessing these funds could be higher than some actively managed options.

Data obtained by Tilney Bestinvest shows while the number of DIY investors on their platform has grown since 2012, rising from 6,185 to 28,308 in 2016, the percentage of total fund sales for passive funds remained steady at an average of 8.5 per cent.

The percentage decreased from 9 per cent in 2015 to 8.6 per cent in 2016.

Meanwhile, nine out of 10 investors using Hargreaves Lansdown do not hold a single passive fund in their portfolios.

Tilney Group managing director Jason Hollands says DIY investors by their nature tend to be more interested in investing and therefore are more interested in selecting active managers.

He adds: “We find investors tend to buy trackers in certain areas, mostly in the US. We consistently see funds like HSBC American Index or single trackers on physical gold, for example.”

Platforum data shows as of June last year, 17.6 per cent of assets on adviser platforms were in trackers and exchange traded funds, while only 5.5 per cent of assets on direct platforms were in trackers.

A Platforum consumer survey of 252 active private investors in January found 26 per cent favour active managed funds compared with 12 per cent of investors who prefer passive or index funds. 

But co-head of the F&C multi-manager team at BMO Asset Management Rob Burdett says he is concerned some adviser-led investors are paying more for passive funds than they would an actively managed solution and are underperforming the market.

Burdett and co-manager Gary Potter argue investors are better off buying a fund of funds directly than having an adviser manage a portfolio of passive funds.

Burdett says: “For retail investors, passive funds make sense, they are the lowest cost solution. But investors who use an adviser can end up paying an extra 2 per cent in portfolio management fees, platform fees and adviser costs.

“If you take a tracker and add these extra charges, returns look very different. Passive funds seem transparent and low cost, but in the advised space, they actually are not.”

The managers note over the past 15 years the MSCI AC World index has returned 152 per cent, while the average Investment Association Global actively managed fund has returned 117 per cent.

But by adding 2 per cent in annual advised fees to that tracker, returns would drop to 89 per cent.

“Passive funds seem transparent and low cost, but in the advised space, they actually are not.”

Counting the costs

Hollands says: “There is a minority of the advised market moving to passive-only solutions as more are aware post-RDR there is more scrutiny over cost so investors are more cost-aware, and to defend their advice fee they see overall cost reduced and look for cost savings through the choice of a passive-only approach.

“The problem with that route is there’s not a single way to investing. If you are only going passive you might miss opportunities in the absolute return space or small companies which in the long run and historically produce better returns than larger companies.”

As of November, index funds domiciled in the UK had attracted around £3.3bn through 2016, while active funds suffered £20bn in outflows, according to data compiled by Morningstar for Money Marketing.

Meanwhile, total net assets in index funds were £110bn compared with £777bn of active funds.

Expert view: Platforum senior researcher Miranda Seath

Seath-Miranda

Our data shows advisers are turning to index tracker funds – although exchange-traded funds are proving to be a slower burn. Sixty-two per cent of advisers have recommended a passive index tracker, representing 17 per cent of assets on adviser platforms.

Passive index trackers come third only to multi-manager/multi-asset funds and single strategy equity funds among the products that advisers have recommended to clients.

Many advisers are looking to reduce the total cost of investing to the client, telling us they have increased their use of passive investments to bring down the overall cost of investing. Discretionary fund managers are also under pressure to reduce their overall charges.

They are increasingly replacing underperforming active funds with passives to reduce the underlying fund charges figure on their model portfolios.

Among DIY investors, however, we still see a marked preference for actively managed funds.

In our latest consumer research we asked self-directed investors where they would invest a £20,000 lump sum: 31 per cent stated an intention to invest the money in actively managed funds whereas just 15 per cent favoured investing in passively managed funds.

This is borne out by the proportion of assets in tracker funds and exchange-traded funds on direct platforms which stands at just over 5 per cent.