Passive funds now make up 10.1% of the open-end fund market, based on assets under management according to the latest data from the Investment Management Association. A decade ago passive funds made up 6% of the industry. This data is just for tracker funds, exchange traded funds have also seen significant increases in popularity.
Since 2004, assets under management in tracker funds have grown five times over, from £17 billion in to £80.6 billion today – but it has not been a solely upward trajectory. Morningstar passive fund analyst Jose Garcia Zarate said that here had been continuous growth since 2009, but before that, the take-up rate was stagnant, and even dropped to 6.3% in 2007 from 6.7% the previous year.
“Passive funds usage increased during the crisis, as many active managers miserably failed to perform during the tough times but still charged their high fees,” he said. “The take-up of passives continues now the economy is doing much better. This point is crucial as it implies that once investors start using passive funds, they become loyal to them; in particular appreciating the considerably lower costs.”
Regulation within the investment industry has also been key in building the popularity of passive funds. The Retail Distribution Review introduced at the beginning of 2013 clarified fund fee structures to investors, naturally contributing to the popularity of low cost passive funds.
“In anticipation of RDR, many passive fund houses in the UK become rather “active” in promoting their trackers and expanding their offering,” said Garcia Zarate.
“Could this be a sign that RDR is indeed favouring the passive fund industry? Well, it’s difficult to say as AUM alone does not tell the entire story. You need net flows data to make that judgement. If the increase in AUM is only via capital appreciation, then the answer would be No, but if the increase in AUM is the product of both capital appreciation and an increase in net flows relative to the RDR years, then the answer would be a tentative Yes.”
Simon Midgen, head of Index Funds Strategy at Legal and General Investment Management said that since the credit crisis, investors had sought out easy-to-understand products which explained the appeal of tracker funds.
Midgen did warn that it was still important for investors to do due diligence before investing as with actively managed funds.
“Not all index funds use the same investment strategy so it is important to be aware of what is happening under the bonnet of your chosen fund, as it has an impact on the costs and efficiencies that are ultimately borne by the investor,” he said.
