The past few years have seen a switch away from the age- old debate about differing performance between active and passive investing to concerns about the difference in costs.
The retail distribution review and its focus on the total cost to the client and, by extension, on the cost of the whole investment process, including that of advice, have been predicted to drive a sharp increase in the use of low-cost investment strategies, ranging from more use of traditional tracker funds, to the rise of exchange traded funds and the launch of a new breed of passive-plus funds, from managers such as JP Morgan Asset Management and Schroders.
In addition, we have seen the launch of several fund managers who put cost – and its impact on investment returns – at the centre of their marketing strategy. Terry Smith’s new investment management business Fundsmith is making a considerable effort to push the low-cost message, as is SCM Private, run by former New Star chief investment officer Alan Miller.
In January, Miller and co-founder of SCM Private Gina Miller established the True and Fair campaign to highlight the use of opaque charging structures.
They have since been engaged in a skirmish with the Investment Management Association over transparency of charges and the excessive level of charges once issues such as dealing costs are factored in. The campaign is now pushing for an online comparison service to help consumers compare the full costs of different funds.
The FSA has also got in on the act. In March, FSA head of investments policy Peter Smith raised the issue of why fund management fees are so high and said this was something the regulator is keeping an eye on.
Smith says: “In what is allegedly a competitive industry, the UK fund market, how is it that the average cost of funds has risen over the years rather than fallen? That is something we are going to be thinking about.”
Although the FSA has no powers to intervene in individual commercial decisions regarding management costs, the IMA has found itself repeatedly having to defend both the level of charges levied by fund managers and their transparency.
The argument has some way to run but it seems the attention on the cost of fund management is having an impact on the selection of investment funds.
Defaqto recently launched a guide to choosing between active and passive funds and the company says it expects to see an increase in the use of passives.
Senior consultant Adrian Gaspar says: “Passive investing has certainly been a theme that has gained momentum in the UK. Passive investing in retail funds in the UK has not gained as much traction as in the US. However, the RDR is likely to result in a level playing field in this regard.”
According to Alliance Trust Savings, the attention on costs had an impact on the top sellers on its platform in the run-up to the end of the tax year.
The company says four out of the top five best-selling funds across its Isa, Sipp and dealing accounts were passive funds. Most popular was the Vanguard FTSE UK equity index fund, followed by Legal & General UK index trust, the Vanguard FTSE developed world excluding UK equity index fund and the Vanguard US equity index fund. The last fund to round out the top five was the M&G strategic corporate bond fund, the only fund to have an annual management charge of more than 0.4 per cent.
Alliance Trust Savings marketing director Garry McLuckie says: “Clients and advisers obviously see the benefit of tracker funds as part of a balanced portfolio. With low AMCs, we expect the appetite for these funds to continue to grow strongly.”
The IMA retail sales figures for 2011 also show a sharp increase in sales of passive funds, with £1.9bn of fund inflows to tracker funds. But despite being the highest level of tracker fund sales since 2003, this was still just 8 per cent of all new retail fund sales for the year and, in total, tracker funds account for only 6.8 per cent of retail funds under management.
If the US example holds true, the UK has some ground to make up. According to Morningstar, consistent growth of sales of low-cost passive funds mean these now account for more than 14 per cent of the US retail investment market.