Blackrock, whose brand iShares is the world’s largest provider of exchange traded funds, predicts a stark rise of index funds and ETFs in the UK wealth portfolios.
Based on its analysis of more than 600 portfolios over 2017 and 2018, Blackrock estimates that index funds and ETFs currently make up 20 per cent of wealth portfolios in the UK. The asset managers giant predicts that this will grow by 50 per cent in two years.
Blackrock said that assets in tracker funds will grow to $0.5trn (£0.4trn), making up 30 per cent of UK managed assets. Blackrock reasoned this estimate on some of the trends it observed in the UK market – such as the recent legislature or technology and market developments.
According to New York-headquartered firm, post-RDR investment management trend of outsourcing to discretionary fund managers and central investment propositions supports index strategies. Blackrock adds: “In tandem with this, an increased fee transparency under Mifid II is shining a light on exactly what people are paying for, which favours indexing and putting ETFs and index funds at the heart of portfolios.”
Blackrock also named the rise of robo-advice as a driver behind its prediction. Blackrock says: “[….] robo-advice and digital wealth management move into the mainstream and make investment accessible to more people than ever, indexing is often the hidden engine – providing the building blocks for portfolios that can be scaled to accommodate different investment styles and efficiently adjust to asset growth.”
Lastly, the asset manager said that many UK platforms are well set-up to provide an access to index funds and many “are working to establish the capabilities to efficiently trade ETFs as well,” which would in turn provide investors with bigger choice.
The asset management trade body, Investment Association’s latest annual Asset Management Survey, published last September, found that the proportion of funds under management in passive strategies stood at 13.5 per cent at the end of 2017 – which it said was a “a slight increase compared to 2016, but more than double than in 2008”.
However, it also said that “flows into equity tracker funds have decreased as a proportion of overall sales over the last three years, suggesting that new money into funds is more likely to be directed towards actively managed strategies than passive ones.”
IA’s data on passive strategies however did not include ETFs, “showing incomplete picture.”
The IA noted that “the growth of ETFs in the UK will also influence the prevalence of passive assets.” The survey mentioned that ETFs are in early stages in Europe, and “majority still lies with the institutional market in the UK.”
In May, IA said it would include exchange traded funds in its sectors.
Blackrock’s head of iShares UK Joe Parkin says: “We’ve reached a pivotal moment in the UK investment story. There is growing recognition that many of the habits and processes that have got us to where we are today have become outdated and won’t meet the needs of clients in the future.
“The investment industry is beginning to stir and respond, and while change won’t happen overnight, the direction of travel is clear and irreversible.
“Our role as an investment provider and partner is to equip our clients with the best tools possible for building efficient and cost-effective portfolios, irrespective of the wrapper they choose.”
Blackrock has been upping its presence in the market. In April, it created a role of the head of UK within a major shake-up of its global business. The company said at the time the UK “is one of its most important businesses globally with over $840bn of assets managed on behalf of British institutional and wealth clients.”
Novia Financial chief executive Bill Vasilieff says: “We are seeing a growing demand on our platform for indexing from both advisers and DFMs including ETFs and mutual funds.
“Investors are increasingly focused on understanding the characteristics of what they hold within their portfolios, and how the different components interact to deliver a specific outcome.
“The transparency of holdings and choice of exposure that indexing provides means they are fast becoming an important ingredient in portfolio construction.”
Brewin Dolphin head of digital channels and investment solutions Gareth Johnson says: “Seven years on from RDR, helping our clients reach their goals has involved evolving our proposition to the changing dynamics in the market.
“More advisers than ever are outsourcing their discretionary portfolios and, with a greater focus on costs, it is increasingly important to scrutinise drivers of portfolio returns.
“This is not about active vs passive, it is about having access to the broadest range of strategies so that we can meet the needs of our clients, or clients of advisers, more efficiently. Index strategies are an important and growing part of the mix in helping us achieve that.”