Passive providers have been slashing fees across their product ranges for the past couple of years, in what at one stage was dubbed a ‘price war’ as fund groups appeared to race to the bottom.
Investors have continued piling into passive funds, whether they are index trackers or exchange-traded funds (ETFs), frequently citing the lower charges as an attraction.
Recent research by FE Trustnet among 2,637 investors and advisers, reveals 22 per cent would not pay more than 0.75 per cent in ongoing charges figure (OCF) for an active UK equity fund.
This means they would miss out on around 90 per cent of the funds available in the market, the research suggests. It also found 37 per cent of those polled would not pay more than 1 per cent in charges for an active UK equity fund, while the average active fund OCF is 0.9975 per cent, according to FE Analytics data.
What this highlights is the increasing pressure on active asset managers to match the perceived value of passive products.
Mika-John Southworth, director at FE Trustnet, points out what is not clear from the research is at what stage advisers and investors are applying this cost filter in their decision-making process.
“The risk is that cost filter becomes an almost automatic active/passive filter,” he says. “The passive fund issue has introduced a new focus on value in the market. I think that is a really good focus to have.”
He suggests the onus is on the fund industry to justify costs and charges.
Simon Hynes, head of UK retail sales at Legal & General Investment Management, observes one of the biggest funds over the past few years in terms of assets under management is Standard Life Investments’ Gars strategy, which he says is retailing at approximately 89 basis points on some platforms.
“With proven active funds, people are prepared to pay,” he asserts. “For some people, value means performance, for others it’s just simply the lower cost.”
| Increased scrutiny: Expert views |
Howie Li, executive director, and co-head of ETF Securities’ Canvas platform, comments on how the active management industry responded to lower cost passive funds: “There remains a central place for active investment strategies in many portfolios but increased transparency and democratisation of the asset management industry has led to a debate about how often genuine outperformance, net of fees, is deliverable consistently. “This has led to much more scrutiny as to how similar the behaviour of an active strategy is to an equivalent passive benchmark. “What is clear is that active managers will always have a role where (i) their strategy is differentiated from a lower cost index and (ii) can deliver additional returns or manage risk more effectively. “This scrutiny is benefiting the end investor as the pressure on the investment value chain continues to build. This has led to stronger efforts in due diligence to ensure that the chosen investment can deliver sufficient additional value to justify any increase in cost over a passive solution. “That said, even these active strategies are being challenged by new and differentiated products that provide exposure to specialist markets, views or investment approaches.” |
