Passive funds will play a larger part in client portfolios as the industry moves towards a fee-based industry, concluded Brian Tora, chairman of a Cofunds roundtable yesterday.
A number of industry commentators debated the role of index or tracker funds in a retail investor’s portfolio at a time when investors are cautious of losing any more money. After one of the strongest downturns in history, investors are also being more aware of the fees active managers charge.
Tora asked the table if there is an argument to favour passive funds as companies like Vanguard move to Britain and BlackRock announces its foray into the asset class.
David Chellow, HSBC’s head of UK wholesale, said: “The debate is not passive versus active, as IFAs prefer active.
In a world of factory gate prices, where you are managing someone’s wealth, passive funds allow advisers to control the total expenses in advance. Passive investments are a tool to bring down costs, allowing the advisers to use active managers to get the skill.”
He added the industry is also moving into a world where the difference in cost between passive and active will become larger as more index providers reduce charges.
“Passive funds are also a decent way to maintain liquidity, so they have other uses, but there is definitely a case for using both in a diversified portfolio.”
Sergio Ferreira, an index analyst at Aviva, said advisers spend a disproportionate amount of time looking at funds that only add a couple of basis points to returns. He prefers to concentrate on asset allocation and invest in passive vehicles.
However, Richard Romer Lee, research director at OBSR, argued it is possible to identify managers that can add up to 5% per year over the benchmark.
“There are not many that can do that, but there are some. Any source of added returns must be a good thing. If you identify a good active manager when your asset allocation is not forensically precise, it is probably a better bet.”
Chellow added that active managers are geared up to understand the fundamentals and risks of the market while investors buying index trackers are buying the winners as well as the losers.
Meanwhile, Russel Lancaster, director of fund manager relationships at Cofunds, said that although there are a number of advisers moving to a fee-based proposition, the vast majority remain commission based.
“We are talking to Vanguard, who do not pay commission, as the industry is now on that journey to a fee-based model. We have plans to unbundle our pricing on the platform next year and will look to accommodate product providers in time. It is not going to happen overnight.”
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