Investment Manage-ment Association statistics show tracker funds are becoming more popular and the removal of commission under the retail distribution review is expected to put active and tracker funds on a more even footing.
Tracker funds reported their highest-ever net retail sales in the first quarter of this year, according to IMA figures released earlier this month. Sales for the first three months of the year soared from £130m in quarter one 2010 to £824m. Trackers now represent 6.8 per cent of total funds under management, the highest proportion on record.
PSigma fund manager Bill Mott says: “Investors are putting more money into trackers because they are cheaper and it has been hard for non-tracker funds to outperform trackers unless you are taking big sector bets.
“As an index gets skewed towards hot areas, there is a tendency for all active funds to underperform trackers, as in the tech-nology boom.”
However, Mott warns investors should not assume tracker funds are low risk. He says: “Trackers offer significant absolute risk even while offering relatively low risk.”
Mott predicts that natural resources could be a poor absolute investment over the next five years. He says: “If that turns out to be true, owning a tracker will be a dangerous absolute investment to make and investors must be aware of that risk.”
He points to the volat-ility of commodities as a reason not to bet on an index as they are often heavily weighted towards one sector, such as oil or mining.
He says: “A unit trust bought on the judgement that the fund manager is making on the merits of the individual companies and where the risk profile can be appropriate in terms of absolute return is better than taking a bet so close to the index.” L&G head of unit trusts Simon Ellis dismisses concerns that trackers expose investors to sectors already overvalued.
He says: “There is a myth that if you are exposed to the index, you are exposed to sectors that are overvalued but all you are doing is following what the market is doing and the market is constantly revaluing companies.”
Ellis says in the lead-up to the RDR, more providers and funds will emerge.
He says: “There will be demand for more alter-native types of funds where themes will grow and sub-derivation will increase in areas such as global healthcare.
“There is a lot more opportunity for special-isation and a broader adoption of themes, such as smaller companies. Somewhere between esoteric and broad market is a good place for index tracker funds to go.”
Ellis refutes suggestions that investors wrongly believe all low-cost funds are low risk.
It is more difficult than it used to be to see what is inside funds just from the title. With a tracker fund, investors know what they are getting
He says: “We have a lot of direct investors that buy into tracker funds and they are aware of the risks. People underestimate the intelligence of investors.”
L&G’s Ellis is looking at which of the company’s institutional pension trackers could be popular with retail investors.
He says: “We have our fixed income funds, the UK index-linked and all-stocks gilt funds and there are opportunities to make fixed income available to retail investors as there are few of them in the UK.”
AES International director Sam Instone says: “Trackers have an important place in investors’ portfolios and they often have better charges, access and terms than other types of funds. But they are not right for all types of clients, such as the aggressive and speculative ones.
“I expect to see an expansion in tracker funds where the asset managers running them diversify as much as they can. iShares will have an exchange traded fund in every sector and country.”
HSBC Asset Management managing director Andy Clark believes simplicity is the key to trackers.
He says: “People will try to add bells and whistles to the funds to make them different but we will keep ours simple.
“It is more difficult than it used to be to see what is inside funds just from the title. With a tracker fund, investors know what they are getting.”
Clarke says the RDR’s ban on commission will see trackers placed on the same level as active funds.
He says: “People will combine passive and active rather than the old active versus passive argument of about 10 years ago.”
AWD Chase De Vere head of communications Patrick Connolly says: “We do use tracker funds where we are not confident that active will outperform, as in UK and US large caps. I think more passive funds will be launched because the charges for investors are smaller, which will give active managers more incentive to show they add real value. They will not be able to hug the index.”