Passive Investing goes ballistic
A quick look at recent Investment Management Association statistics for the first quarter of this year show that index tracker (passive) funds had their best-ever quarter ever; up 19 per cent on the previous year.
Already hugely popular in the States, UK investors, mainly via fee-based IFAs, are wakening up to the increased supply of factual data and logical reasoning that favours passive over active fund management.
That data is compelling, showing that over extended periods, such as five or 10 years, for bonds and equities, the majority of managers fail to beat the index.
Research has also identified the culprit, and it is not necessarily because active managers are “bad”. The data shows that cost is the cause of many managers’ failure to beat the index return. Not all managers are bad, indeed there are some very good managers, but their need to overhaul the drag as high total expense ratios create an often impossible hurdle to overcome. Low Total Expense Ratios (TERs) mean more of the return achieved goes in to the client’s pocket rather than the fund manager’s, increasing the potential after-costs return to clients.
More advisers are questioning the TERs being paid for mediocre net-of-costs performance and deciding that index investing is the better route. The true long-term impact of cost is also becoming clearer. Assuming the same return, a fund with a TER of 1.6 per cent will erode 33 per cent of the client’s portfolio over 25 years. An index fund with, say, 0.2 per cent charge will erode less than 5 per cent of the portfolio.
Source: FTadviser ‘New Star rising’ 28.07.11
Past performance is no guarantee of future returns. The value of a unit linked investment is not guaranteed on encashment and you may not get back the full amount invested.