Passives have had another strong year, yet the proportion of advisers looking to increase their allocation is waning. Henry Brennan asks: has the use of passives started to peak?
Figures from the Investment Management Association (IMA) show the number of available tracker funds is up 11% on the start of the year, rising from 63,921 to 70,852 by the end of the third quarter, comprising 9.6% of the industry total – a record high.
Their increasing prominence has led investment services provider Morningstar to issue a ratings system for passive funds as a reaction to their growing popularity.
Yet, a survey of advisers carried out by Schroders indicates the industry may be approaching a "ceiling" where passives are concerned.
Has the popularity of passives started to peak?
Two thirds of the 328 advisers asked have increased their use of passives this year, however, just 25% expect to increase the proportion during the next 12 months. This "indicates we may be reaching a ceiling on passives", according to Schroders head of UK intermediary Robin Stoakley.
However, there are a number of factors which could continue to drive the use of passive funds.
A Barclays research note indicated that the post-Retail Distribution Review (RDR) environment, and the greater pricing transparency that comes with it, is conducive to passive growth.
Barclays research analyst director Daniel Garrod said: "Advisers are now faced with trying to maximise their portion of a relatively fixed (if unknown) total fee that clients are willing to pay. Passive management is far cheaper than active management, leaving a potentially larger piece of the total fee to be captured by the adviser."
Another aspect to this concerns the emergence of super clean share classes.
CWC Research director Clive Waller said a consequence of exclusive preferential share class terms coming to market might be to motivate those who cannot obtain them to rely more heavily on passives.
He said: "It is possible that IFAs, if they are getting a higher share price than a competitor, they might move away from that market. If [an adviser] cannot get a top fund at 65bps, but a competitor can, they might go to number two on the list. If it is contagious and there are too many funds discounted and I cannot get them, I might look much more seriously at a passive proposition and ETFs. That is a possible second level outcome that is very likely to happen should price cuts prove contagious."
Additionally, stamp duty on EFTs will be scrapped from April, increasing the probability of new, domestically-domiciled funds coming to market. A more competitive market will drive down costs, adding to the allure of passive options.
While the number of domestically-domiciled ETFs is negligible - the vast majority are domiciled in either Dublin or Luxembourg - the decision is hoped will encourage more to locate to the UK.
Mark Johnson, head of UK sales at iShares, said: "This should ultimately increase consumer choice and support the growth in the use of ETFs by a wide range of investors from retail through to pension funds and insurance companies."
If a ceiling on passives is indeed approaching, it is being met by an increasingly favourable environment to consider them in.
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