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Track attack

JP Morgan Asset Management has unveiled plans to tackle the passive market with the launch of a low-cost active tracker, which it says is an RDR-ready Oeic with commission stripped out.

The JPM active index plus fund is a rebrand of the firm’s UK active 350. The fund, which will continue to be managed by Michael Barakos, will have its annual charge reduced to 0.25 per cent, as well as fixed expenses of 0.15 per cent. There will be a performance fee of 10 per cent, capped to ensure the total expense ratio does not exceed 0.55 per cent. The changes were officially put in place on February 1.

The fund will have its benchmark changed from the FTSE 350 to the FTSE All-share index. The UK active index plus fund will operate between a plus or minus one weighting on the 130 stocks in the portfolio to get the active performance in a bid to outperform passive funds.

The £64m UK active 350 fund was third-quartile in the IMA UK all companies sector over three years, having returned 6.6 per cent. The question that remains is whether this is the first of many as the asset management industry looks to tackle cost squeezing and the growing use of passive products as an alternative.

JPM head of UK retail sales Jasper Berens says he would challenge any financial adviser who uses passive funds within a UK portfolio to look at the product. He says, at its worst, the fund will only underperform as much as a tracker and has the ability to outperform as an actively managed fund.

He says: “We want to do more in this area in the future as I believe advisers have been putting passive funds into their clients’ portfolios just because it is cost-effective. They now have a valid alternative. A lot of their growth has been down to them being a price alternative.”

Passive investing, in particular the use of exchange traded funds, many of which track an index or market sector, has grown substantially over the past decade in terms of inflows and the number of products available. Fans of passive investment strategies say it is very difficult, if not impossible, to beat the market and that it is therefore a better and more cost-effective option to track the index.

BlackRock’s global ETF research and implementation strategy team estimates that global assets under management in ETFs and exchange traded products are anticipated to increase by 20 and 30 per cent annually over the next three years. It says assets in ETFs and ETPs are expected to grow to $2tn by early 2012.

Hargreaves Lansdown investment manager Ben Yearsley says: “There will be pressure on active managed funds in the UK as, of the 2,000-odd out there, only 10 to 15 per cent are solid performers and the rest are mediocre. It is right that mediocrity is challenged. I think we will see more active funds come under pressure from these types of passive funds with a twist. It is too early to say whether others will look to join the fray but it would be foolish to rule it out.”

Henderson director of retail business Stewart Cazier previously revealed his firm is looking at launching tilted trackers and expects other firms to follow suit. Speaking to Money Marketing in February 2010, he said the retail distribution review will prompt investment companies to launch these products as clients will pay a fee for using a platform, meaning there is no barrier to passives and trackers distributed via platforms.

Cazier says firms will look to offer products that follow an index but add active bets on top to beat the index by 1.5 to 2 per cent.

Legal & General Investments managing director Simon Ellis agrees that more asset managers will move into the sector. He says some big providers do not want to compete with pure index and ETF offerings but warns he does not see a huge upside to enhanced index- tracking.

He says: “The history of enhanced products on a global scale has been poor. The vast majority of these quantitative models use the same factors, which means that if things go wrong, all these products go wrong at the same time. Such products are over-complicating simple investor aims to get exposure to the market as cheaply as possible.

“A lot of the bigger guys are going to come out with these products that charge between passive and active fees to add small layers of performance when things go right in the markets. There is little reward for IFAs or investors.”

Whitechurch Securities managing director Gavin Haynes says: “We prefer one approach or the other, whether it is a passive option or a fund manager who can outperform on a stock or sector level. We are not sure on the halfway house, there are some markets and areas where we prefer passive. There is a lot of average perform-ance in the industry that needs to be looked at. A lot of fund managers realise they are under threat from passive strategies and we will see more to address that in the future, whether that means they all go down the JPM route remains to be seen.”


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