Nine out of ten investors using the UK’s largest retail broker do not hold a single passive fund in their portfolio, remaining faithful to fund managers despite long-running concerns over bad performance and high fees.
Hargreaves Lansdown said the majority of its customers stuck to more expensive, actively managed funds, despite recent evidence showing that they largely underperform their benchmarks after fees.
According to a study from data provider S&P Dow Jones Indices released in March last year, 86 per cent of actively managed equity funds in Europe underperformed their benchmark over the past decade.
The number of Hargreaves’ investors picking at least one passive fund for their portfolio has increased to 10 per cent from 6 per cent since 2011 — an uptick in interest that considerably lags behind the market more broadly.
According to data from Morningstar, investors globally have poured more than $6tn into passive funds since 2007, increasing their size by around 230 per cent.
Hortense Bioy, director of passive fund research at data provider Morningstar, said it was “shocking” that so many DIY investors were still shunning trackers. “Too many retail investors are clearly missing out on the benefits of passives, not least their low-cost advantage,” she said.
“They are probably also missing out on performance, since it is now well-documented that active managers struggle to add value over the long term.”
Ms Bioy added that the absence of passive funds on many best-buy lists may be causing investors to overlook trackers when picking funds.
The UK watchdog recently published a wide-ranging review into the fund industry which many analysts interpreted as a deliberate attempt to push investors towards passive funds.
The regulator voiced concerns that financial advisers and online fund supermarkets were not doing enough to promote passive funds to customers. It found that only 6.9 per cent of the funds sampled from brokers’ “best buy” lists were passive funds.
Hargreaves added passive funds to its list of top funds — the Wealth 150 Plus — for the first time last year. But Laith Khalaf, senior analyst at the firm, said the funds had gone “from strength to strength” as investors plumped for a mix of high quality active funds and low cost trackers.
“The middle ground, inhabited by closet trackers, is likely to get increasingly squeezed as this trend develops,” he said. “There are still billions of pounds stuck in mediocre active funds, which we can expect to gradually run down as investors wake up and smell the fact they can get better value elsewhere.”
The relatively recent addition of passive funds to many best buy lists has been part of the problem, said financial adviser Patrick Connolly.
Mr Connolly said self-directed investors were guided by the brokers they used — adding that “most discount brokers have predominantly recommended and promoted active funds.”
“Most advised clients will also be heavily skewed toward actively managed funds,” he said. “However, passive investments are clearly becoming more popular and over time I would expect them to have a far bigger weighting in both advised and self-directed portfolios.”
Some argued that active funds have enjoyed higher marketing budgets and greater publicity for years, and were therefore more visible to investors.
“It does not really surprise me in general,” said Peter Sleep, senior portfolio manager at wealth manager Seven Investment Management, who said the media was partly to blame.
“The active fund managers are much more aggressively marketed to retail [investors], especially in Isa season,” he said. “On the other hand, the passive providers do not tend to have such big marketing budgets and are generally mute in the retail space.”
Passive investing has truly come into its own in the last few years, but there are many investors who haven’t made the leap
“Passive funds are boring — editors want stories with a human interest and not boring stories about passive investments or about tracking error,” he said.
Mr Sleep added that passive funds suffered in the days before regulation preventing fund houses paying commission to distributors. While active funds paid advisers and brokers commission, passive funds did not, he said.
Adam Laird, head of ETF strategy at passive fund house Lyxor, admitted that many retail investors had still not bought passive funds.
“Passive investing has truly come into its own in the last few years, but there are many investors who haven’t made the leap,” he said, adding that pension funds had been the “early adopter” while wealth managers were currently the biggest growth market.
However, Darius McDermott, managing director of Chelsea Financial Services, an online investment adviser, suggested that investors preferred active funds. “Most self-directed investors want a bit more than passive exposure and are prepared to take extra risk for extra return,” he said.