Why Pension Savers are Choosing Passive Funds

Alliance Trust chief Katherine Garrett-Cox on how greater transparency has led to investors favouring passive funds - and why active managers need to reduce costs for pension savers

Emma Wall 21 May, 2015 | 1:24PM
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Emma Wall: Hello and welcome to Morningstar. I'm Emma Wall and I'm joined today by Katherine Garrett-Cox, Chief Executive of Alliance Trust.

Hello, Katherine.

So we're here today to talk about active versus passive, if that's the right phrase. You talked quite interestingly just now at the Morningstar Investment Conference, about the difference in the popular funds in 2013 on the platform compared to 2014. 2013, 70% were actively managed funds. 2014, 7 of the top 10 were passive funds. What's caused that shift?

Katherine Garrett-Cox: Well, it's really interesting. I mean, firstly, the fact that we can track it. So on Alliance Trust Savings we can see that some of the biggest selling funds are the passive trackers now. We're obviously standing back and trying to assess what's caused this and I think it's a number of things. I mean clearly, RDR has had a big impact, but I think also it's this greater transparency around what people are actually being charged for.

So I think the long and short of it is that, I do expect this trend to continue. And I think investors are wising up a little bit more, particularly in the retail space. So, we've had a huge campaign through our investment-focused website over the past year trying to help people understand financial products much better. And I think, in the past, I think that was a definitely a sense that people had the world pulled over their eyes. I think now people are wising up. They recognise they've got to save for their future and what they want is value for money.

And in part, I think they've been attracted to certain tracker products. It doesn't mean that active management is dead, but I certainly think that people are becoming much more discerning.

Wall: And you are talking about charges there. One of the big things that's been in the pensions world over the last year and half is the concept of the charge cap. This magic 0.75% number, a lot of active managers have said, that, it's just not possible to offer their premium kind of funds, their actively managed funds at that price. You said at the Investment Conference that that's just not true. I mean how do those two ideas marry?

Garrett-Cox: Well, I mean I think it really comes back to, who are we actually managing these products for? Now, I think in part, the asset management industry is going to go through a quantum shift over the next few years, because I think for far too long, they've written on a sense of very profitable back-books, so they're slightly hidden under a veil of secrecy around the charging structure and now it's all out in the open.

So the reality is that in many different cases, the fixed cost base of some of these organisations is simply huge. So they haven't got the flexibility to vary it up and vary it down. Now, I am afraid, I just – and I've worked in investment houses of all different shapes and sizes for over 25 years now – I just don't buy the argument that, better performing products deserve premium prices because there is no guarantee.

I mean if you read the small print, what you got this year is simply no guarantee that that's what you'll get the next year. It's much more about buying into organisations that are doing the right thing, where you've got strong team-based culture and where the investment performance is actually delivering for you.

But I think – I think if I'm honest, investors are going to become again much more critical and will chose. So I am well aware that there are number of pretty big organisations who have a very robust approach. I just question their motive, who are we doing this for?

I mean one of the reasons that people don't trust financial services is because for many years, they've had a sense that we're just feathering our own nest and I think there has been a vestige of truth in that, which is why I think, you know, we've always stood for value for money, transparency, trust and I think we're really happy to take some of these big houses on.

Wall: And to that point, you have set up this educational hub, in order to make sure that investors are aware of the things, they should be looking for – aware of the things they just shouldn't be taking on actually and saying, that's not for me.

Garrett-Cox: So we basically, I mean largely in response to a lot of requests that we got in early last year, we set up Investment Focus, and in one year we've had more than a 100,000 unique visitors to the site. Probably, the most interesting thing about it is that, I mean – by far in a way, the biggest percentage of visitors to us are pre-retirement age, and nearly a third are under 45. So, I think that is an interesting trend and theme.

The other really interesting thing about it, given that we're both standing here today is that, nearly half of the respondents were female. I think what that says to me is that, there is a crying need for greater transparency, greater clarity and greater financial education.

So now that really helps us in terms of, ‘how do we help people make those decisions?’, because investment is a very personal choice. Everybody's personal circumstances are very, very different. And I think that as an industry, we have a responsibility and a duty of care to help people save for their future.

Wall: Katherine, thank you very much.

Garrett-Cox: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Emma Wall  is former Senior International Editor for Morningstar

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