Tracker funds experience fall in popularity

Sales of tracker funds fell in the second quarter of this year to their lowest level since the first quarter of 2010, according to new figures from the Investment Management Association (IMA).

Net retail sales fell to £312m, down from an average of £534m per quarter over the last year.

With passive investing growing in popularity, what was behind this fall in net retail sales?

Investors increasingly want a low-cost way to access investment markets. Tracker funds used to be the default option for achieving this.

Their passive approach to investing, which does not typically require the involvement of an expensive fund manager, means that costs are kept to a minimum. A computer is cheaper to feed than a fund manager.

Tracker funds are also typically marketed with a clean pricing structure, which means their annual management charge does not include a margin for advice or platform administration, as is common with actively managed funds.

This can make tracker funds look relatively cheaper than active funds, although a like-for-like cost comparison shows a much smaller gap in pricing between the two fund styles.

Could the growing level of investments in Exchange Traded Funds (ETFs) explain this fall in tracker funds net retail sales?

ETFs have exploded in popularity with UK investors in recent years; traded on the stock market like a company share, they are often more flexible than investing in a tracker fund. The charges can often be cheaper than tracker funds on a like-for-like basis as well.

Whatever the reason for the fall in net retail sales of tracker funds in the second quarter of 2012, our investment philosophy at Informed Choice makes use of passive and active funds, as we believe there are circumstances which suit both styles.

In efficient markets, such as the US equity market, a passive fund or ETF makes a lot more sense than active management, which struggles to add value. In more inefficient or smaller markets, we prefer active management where this style can more readily deliver value, assuming the manager runs the fund with a high active share.

Passive funds in all of their flavours are likely to become even more popular in the future, particularly as investment platforms develop and provide access to these funds for a greater number of investors.

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