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Advisers are yet to be wooed by passive investing

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.

Tracking trackers
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.

Can passive investing meet the ESG challenge?

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.

Preparing for an all-passive world

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

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Comments

There are 24 comments at the moment, we would love to hear your opinion too.

  1. I know I’m a champion moaner, but this is something to celebrate. It shows that advisers are not sheep. Sure use a few trackers judiciously (10% – 20% or so) but active shows you engage and understand investments and with careful management actives do better in both directions. They can make more in rising markets and lose less in falling ones, and you don’t get all the rubbish packed in.

    Good for you all.

  2. As far as ETFs are concerned, these are more of a ‘pig in a poke’ than conventional trackers and when platform and other charges are taken into account there isn’t a great cost difference.

  3. There is no market without active.
    Passives can’t exist without actives, but the latter can.
    I pretty much agree with Harry, although we probably have more like 20-30% in passives.
    We’re not sheep and see no reason or logic in putting ALL a clients monies in to sheep. But if sheep are cheaper to manage than goats, having a few goats, pigs and even cows can be a good idea.

  4. I meant goat’s are cheaper to manage than sheep. Just showing the human error can occur with active typing, but if the programme is wrong on passive, everyone is forced to make the wrong decision automatically with no brake on decision making.

  5. Unbelievable really, but there you go. I would suggest that £12bn in Lifestrategy tells a slightly different story? Lifestrategy 20%, 40%, 60% & 80% all top quartile since launch and 1, 3 & 5 years. Similar for back-tested to 2005 and historically in the USA.

    Individual’s/institutions fleeing active/hedge funds at an alarming rate, consolidation of fund house’s, significant fund closure’s creating survivorship bias distorting naive views, passive fund out-performance in recent market volatility, “Star” managers falling to the wayside etc etc etc

    And wait, daily trading of stocks at record levels despite increasing use of passive’s. Passive utopia, my backside!

    But then, I guess we shouldn’t let the evidence get in the way of a good story.

  6. Passives come with a guarantee, namely performance that can never be better (or worse) than the average of all actives. The job of a good IFA ~ and, with regular reviews, it’s not very hard to achieve ~ is to select a broad spread of actives that consistently (as far as is reasonably possible) outperform a given benchmark by at least twice the additional costs.

    • If fund managers, investment consultants, DFM’s & large brokerage’s can’t do it, what chance does an IFA have?

      • “Passives come with a guarantee, namely performance that can never be better (or worse) than the average of all actives”

        In other words, a guarantee of 1st or 2nd quartile performance once accounting for survivorship?

      • Who says they can’t? In their glory days, Woodford and Bolton certainly did, consistently and and for long periods.

        Neither 1st or 2nd quartile performance are the average. How can they be? The average is the mid point between the best and the worst, i.e. somewhere between 2nd and 3rd quartile.

        I take it you’re a diehard fan of passives (with not much of a grasp of arithmetic).

        • I suggest you take a look at Lifestrategy, definitely not average. Or any US, European, Emerging market or UK Tracker for that matter. All 1st or 2nd quartile. This is what Morningstar says about L&G UK Index:

          On a trailing 10-year risk-adjusted return basis, the fund has ranked in the upper boundaries of the second quartile. This fund comes across as a solid FTSE All-Share tracker with consistent above-average performance in its category. On this basis, we confirm our Morningstar Analyst Rating of Silver.

          Of course, this is all before accounting for survivorship which will push most passive’s.

          My arithmetic is fine thank you.

          • Okay, but I still don’t understand how the performance of any passive index tracker fund can be any different ~ better or worse ~ from the average of all the active funds trading within that index. Without active funds (and the very small number of direct investors), the ebb and flow of any index would be akin to that of the Norfolk Broads.

            The only differentiators between one passive fund and another are charges (Fidelity’s UK All Share index tracker seems to be the cheapest at just 0.06% p.a. compared with L&G’s 0.48% p.a. with a Bid/Offer spread of 0.59%) and tracking accuracy. A lack of tracking accuracy does, of course, result in deviation from the index but, in the short term, the effects of such deviation are positive as often as they are negative. Over the long term, such deviations should make no appreciable difference. So the only meaningful differentiating factor between one passive and another is charges and those of L&G’s All Share index tracker aren’t the lowest.

            So forgive my lack of understanding here, but I just don’t get how the performance of any passive index tracker can fall anywhere other than midway between 2nd and 3rd quartile.

  7. Some readily available Total Return stat’s, averages over 5 and 10 years to 1/11/18:-

    1. The FTSE All Share index 5.46% and 9.88% p.a.

    2. Average of all active funds trading within the FTSE All Share index 5.1% and 9.1% p.a. (lower, presumably, because of charges) and

    3. Slater UK Growth (for example) 11.9% and 20.1% p.a. ~ more than twice the returns on just the index.

    Why would anyone want (or consider themselves to be well advised) to invest in a FTSE All Share Index tracker?

    • Firstly, the average of all active funds is boosted by survivorship bias. Over a 10 year period only about 40% to 50% of funds survived the 10 year period. The closures are not in the averages (and those closed mostly due to under-performance). The UK is the market leader in fund closures which is partly why a tracker does not look as good here as it does in say the US.

      1st or 2nd quartile passive performance is almost guaranteed due to costs (as you have concluded from 2 above).

      Thirdly, it is almost impossible to spot the “Slater UK Growth” of the future, and many studies have been carried out on exactly this subject. Human nature means that we buy in after out-performance and sell out after under-performance. If we buy 10, 15 or 20 active funds we have absolutely no chance of out-performance. The odds are simply too great.

      • What about the client who was advised 10 years ago to invest in Slater UK Growth (along with a few other funds which, at the time, showed similar promise) rather than in a cheap and cheerful whole of Index tracker? How likely is he (or his adviser) now to declare Slater UK Growth to have had its day and (barring some dramatic change such as a change of manager) unlikely to continue to outperform the index? Not very, I suggest.

        • You mean like Neil Woodford?

          • According to Morningstar Slater Growth is in the UK Small-Cap Equity sector, and has a growth bias. Its hardly comparable to the FTSE ALL Share which is large cap with a value bias (as can be seen from its riskier nature/under-performance in the recent past?).

            Do you sell, or wait and see like Neil Woodford? What if this carries on? What if small cap continue’s to under-perform large cap (which is entirely feasible after a long spell of small cap out-performance)? What if Value returns to favour after being in the doldrums for years? Mean reversion has always been, and will always be present in markets.

            These questions, in my opinion, are easier answered with a globally diversified blend of all investment styles, at low cost (passive, active or otherwise).

          • What all this to-ing and fro-ing boils down to is that you’re firmly wedded to the idea that a carefully selected, appropriately diversified and regularly reviewed portfolio of active funds can and never will outperform the index, so why bother with anything other than the cheapest All Share tracker available (which appears to be that of Fidelity)? Is that the fund you use for the UK Equity element of all the portfolios on which you advise?

            Okay, you’re entitled to that view, but I think you’re one of a small minority.

          • The FTSE All Share isn’t just large cap with a value bias ~ it’s large cap, small cap and everything in between. Hence it’s called All Share.

  8. Charley Ellis “If you as an investor would like to have a top quartile investment return over the next decade: Index”

    https://www.cnbc.com/2018/07/18/investment-guru-charley-ellis-reveals-how-funds-lie-with-statistics.html

  9. Generally we use Vanguard Lifestrategy dependent upon risk profile, but do blend with low cost active strategies from time to time.

    I think the figures speak for themselves? Have you looked at them or do you not have access to them through a restricted advice network?

    • Tenet is not a restricted advice network, though some of its members are by personal choice restricted (as are many so called IFA’s, without actually admitting it). My chosen restriction is by choice of platform, not funds, though approval must be obtained to use any funds not on Tenet’s panel (which is driven by deFaqto).

      Yes, the performance of Vanguard’s Lifestrategy fund of passive funds is certainly respectable (over 5 years), though there are several active funds (by no means all small cap) with track records a percentage or two p.a. better, even allowing for higher charges.

      Still, when all is said and done, it’s the results we achieve for our clients that’s important, is it not, however we go about it?

  10. It does strike me that the ongoing debate between active a passive rather mirrors the Brexit debate. Neither side prepared to give an inch.

    As I said in my post passives to fulfill a useful puprose. In each sector (Global, UK, Asia, N America etc) One of the holdings should be a passive. If the rest of that sector (as a whole) doesn’t do better than the passive then the adviser is failing.

    As to Rob Wood who posted that IFAs have no hope of beating the index all I would say is that he needs to get out more.

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