PA ANALYSIS RDR passive-investor friendly

Even though RDR removed the commission barrier and stamp duty on ETFs has been abolished, passive funds are not finding everything their own way despite competing on their own terms with the active giants.

PA ANALYSIS RDR  passive-investor friendly


With the recent abolition of stamp duty on ETFs, another stumbling block to the growth of passives is removed. But has it translated into fund flows for the passives sector?

Track that index

From early in 2013, it was clear that adviser interest in passive funds was growing. Cofunds, for example, said that a number of newly added index trackers moved straight to the top of its best-seller lists, notably those from Vanguard.
Elsewhere, L&G's half-year results suggested that passive funds were on a roll with its results showing sales of its passive funds up 65% to £1.2bn over the six months to 30 June compared to the same period a year earlier. It said at the time that it expected growth in the passive market of between 10% and 20% per year. 
Although part of this growth is undoubtedly being generated from the preponderance of passive model portfolios now available, and advisers turning to passives to protect their advice margins, there are signs that passives are also gaining traction among direct investors as well. Hargreaves Lansdown reported growth in ETFs on its Vantage platform of 88% from 2010 to November last year. 

ETF Closures

However, despite the popularity of passives in general, ETFs have closed in significant numbers. Independent research firm ETFGI found that 117 ETFs closed in the first half of 2013. Equally, out of the 4,849 ETPs on the market, over 60% hold assets of less than $100m. 
This echoes research by BlackRock, which found that only 45 of the 1,810 European ETFs hold assets above €1bn: "The majority of these funds (32) are equity funds, followed by bond funds (11) and commodity funds (2) that invest in physical gold," it said. These 45 ETFs account for 44.6% of the overall assets under management in the European sector, with the ten largest ETFs accounting for almost a quarter of the market. 
This suggests that it is has been more 'vanilla' ETFs that have gained traction. Hargreaves Lansdown has previously suggested that its clients tend to use ETFs to get access to areas where it is difficult to invest through traditional funds, such as commodities, or where active managers don't tend to add value, such as in the US market. 
While there are stronger flows from UK advisers, the passive industry as a whole appears to be entering a more mature phase. BlackRock reported that assets under management grew by €32.30bn (£26.8bn) or 11.4% over the 12 months to 30 September, 2013, up to €282.55bn. The sector has been hit by the weakness in gold and there have also been significant fund flows out of a number of fixed income funds. 

A not-so-clear cost advantage

Nevertheless, the passive providers are building traction. Vanguard, for example, has moved from the 38th largest fund manager in the UK at the end of 2012 with £3.4bn under management to the 30th largest fund manager at the end of October 2013 with £5.95bn under management. This is significantly stronger growth than some of the active giants. M&G, for example, has seen assets move from £41.7bn to £43.5bn over the same period. 
The regulatory furore around passives appears to have died down. The FCA started to get twitchy about the risks inherent in synthetic ETFs, but appears to have been reassured for the time being at least. 
Passives will undoubtedly have a prevailing wind for a number of years, but investors should be wary of calling the death knell of the active industry just yet. As costs are unbundled, platform charges are added to passive costs and active managers reduce their fees, the cost advantage for passives may not be as clear, which may limit growth in future.