Well on Track – DIY Investors ‘Flock’ to Passive Investments
Low-cost tracker funds, predominantly ETFs, have become increasingly popular with investors and this has led the UK’s biggest DIY investing platform to include them on its best buy list for the first time.
FTSE 100 listed Hargreaves Lansdown, which manages more than £60bn on behalf of retail investors, said it would feature 13 tracker funds from Legal & General, BlackRock and HSBC on its Wealth 150 Plus list, a selection of what it considers to be the best funds on the market.
‘Passive’ funds, which track and seek to equal the performance of an index such as the FTSE 100 or S&P 500 rather than beat it — are considerably cheaper than those that are actively managed; they have attracted increasing numbers of investors in recent years that have recognised that keeping costs as low as possible is one of the keys to a successful investment strategy.
Hargreaves Lansdown said the proportion of its investors choosing index tracker funds had nearly doubled in five years, up from 6.1% in 2011 to just over 11% in 2016.
‘keeping costs as low as possible is one of the keys to a successful investment strategy’
There has also been a large increase in the variety and type of tracker funds available, delivering low cost access to pretty much every sector and territory around the world; awareness of, and education in the use of ETFs has been crucial.
Investors under 40 are the most likely to hold ETFs, whilst those over 60 are the least; however, three-quarters of customers who held passive investments on Hargreaves’ platform also held actively managed funds.
‘We expect a continued polarisation of the UK funds market, with monies flowing into high quality active funds at one end of the spectrum and low cost passives at the other,’ said Mark Dampier, HL’s Head of Research.
Recent interest rate cuts have fed through into savings and investment products and with investment returns under pressure, private investors are reluctant to absorb the high fees charged by some actively managed funds.
‘with investment returns under pressure, private investors are reluctant to absorb high fees’
There has also been a lot of dissatisfaction among those that have invested in what they believed were actively managed funds, only to find that they were what are being dubbed ‘closet trackers’ – pseudo actively managed funds that fail to beat their benchmark whilst charging handsomely.
According to a recent study by Morningstar, the popularity of passive investing has had a self-fulfilling benefit in that increasing demand has pushed fund charges down across Europe.
‘The middle ground, inhabited by closet trackers, will become increasingly squeezed out of the picture, as investors continue to vote with their feet, and seek out real value in both active and passive funds,’ Mr Dampier added.
Most of the big online investment platforms offer lists of selected funds, allowing them to be screened according to a range of criteria to ensure that the investor gets the ‘right’ product for their personal objectives.
Appearing on a recommended list such as the Wealth 150 can potentially direct billions of pounds invested by retail consumers into a fund; fund managers cannot pay to appear on the list, but most are prepared to negotiate a discount for investors using a given platform.
Hargreaves Lansdown claims to have negotiated an average discount of 32% to the standard price of the tracker funds featured in the Wealth 150 Plus list.
The three cheapest trackers that are featured — Legal & General’s UK Index, UK 100 Index and US Index — have a net ongoing charge of just 0.06% a year.
Other funds included are the BlackRock Corporate Bond Tracker (net ongoing charge of 0.12%), BlackRock Japan Equity Tracker (0.11%), and the HSBC FTSE 250 Index (0.08%).
Hargreaves previously included these funds on its ‘Core Tracker List’, but moved them to the Wealth 150 Plus list ‘to make it easier for investors to compare funds, both active and passive, across each sector’.
Holly Mackay, of Boring Money, said the inclusion of passive funds was a ‘positive step’ because the best buy list was ‘a hugely influential funnel for DIY investors’ fund selections’
As fund rebates and commissions have been banned, brokers such as Hargreaves Lansdown are now paid directly by their customers rather than by opaque backhanders,’ she said. ‘This has created a more level playing field for the passive funds to compete — in the old days, the fatter active funds had more rebates to pay the brokers. That gravy train has run out of steam and, from a revenue perspective, the brokers are truly agnostic about which funds we pick. That is better for everyone.’
Hargreaves Lansdown’s decision comes hot on the heels of an announcement by rival investment platform Selftrade that it would shortly be launching a screening and selector tool that allows a user to select ETFs that deliver equivalent exposure and performance as an actively managed fund – unit trust or OEIC – but with lower charges.