Square Mile will include ratings for open-ended passive funds within its rating service Academy of Funds.
A total of 46 funds will be added initially, with performance judged on their one-year daily rolling performance records over five years.
In its selection process, the firm will choose “realistically priced products” within the 30bps costs bracket and will only include funds above £50m in assets under management.
Square Mile will primarily consider total return of funds in its assessments rather than how the products mirror market movements.
Square Mile head of investment Jason Broomer says: “There has been a significant increase in interest in passive strategies with some £50bn of the £165bn invested in mainstream UK equity funds now held in passives. Cost has been a key driver of this interest.
“However, since the implementation of RDR, 85 per cent of active UK equity funds have AMCs below 1 per cent while £10bn sits in UK retail index trackers whose AMC exceeds 1 per cent.
“We feel the focus should be on the much more important consideration of whether a fund – active or passive – meets investors’ desired outcomes. The new recommendations on passive funds within our Academy of Funds will help investors determine whether a strategy is suitable for their objectives.”
The Square Mile Academy of Funds was launched in July 2014 and uses A, AA or AAA ratings based on the firm’s view of the fund’s ability to meet expectations.