Advisers are avoiding putting all their eggs in the passives basket
Few advisers have wholeheartedly taken on board the arguments for index-tracking and put all their eggs in the passives basket. Indeed, advisers are deeply split in their attitudes towards passive investing.
There is no denying funds in passive investment vehicles have been on the rise in recent years, particularly from the adviser distribution channel. Index-tracker funds now make up 16.5 per cent of total funds under management in UK-domiciled funds.
Total net assets in European exchange-traded funds have also swelled to over €700bn (£618bn). However, where UK advisers are using passives, the preference is skewed towards trackers, with very low adoption of ETFs.
Our recent report, Tracker Funds and ETFs, looked at how advisers are adopting passive products in their investment propositions.
A survey asked for their views on investments in index-tracker funds and ETFs, as well as passive multi-asset funds and model portfolios.
The vast majority – 94 per cent – have some allocation to passives in clients’ portfolios. But while just 6 per cent avoid passives entirely, active products continue to make up the lion’s share of advised investments.
Indeed, few advisers have a clearly defined passive investment focus; just 13 per cent say their clients hold between 51 and 100 per cent of passive products in portfolios.
Only a handful of those are building passive-only propositions or incorporating flagship passive multi-asset funds, such as Vanguard LifeStrategy, into their investment propositions. More than half those surveyed have between 1 and 20 per cent of clients’ money in passive investments of one kind or another.
An eye on cost
Low fund management charges in relation to their active counterparts are the most commonly cited reason for advisers recommending passives. Choosing passives is one way to keep down clients’ overall costs of investing, which is likely to be an increasingly important factor as Mifid II reporting of charges heads into its second year.
We frequently hear that, in sectors where advisers see little difference between good active managers and the benchmark, the cost of a passive fund makes the choice more effective – US equity, for example.
But while the passive fund sector has had some success in getting advisers to buy its products, the ETF movement has barely gained any traction at all, despite years of effort.
Three quarters of advisers have previously recommended index-tracker funds to their clients, while just a quarter have recommended an ETF.
Although some advisers acknowledge their clients may well have exposure to ETFs within multi-asset funds and discretionary model portfolios, very few would recommend a direct investment into ETFs or would include them in advisory models.
They continue to heavily favour the mutual fund structure when looking for passive exposure.
Advisers say they are comfortable recommending mainstream products such as multi-manager funds, multi-asset funds and index-trackers, but investments they regard as being more niche or where they do not hold the required regulatory permissions – such as ETFs, investment trusts and directly-held securities – are failing to attract much interest, at least in the short term.
“If it ain’t broke, don’t fix it” seems to be the prevailing view, with advisers saying they intend to carry on much as they have until now.
Andrew Ashwood is an analyst at Platforum