What is clear is that just picking a manager is the wrong approach, it is much more about understanding what they are doing and whether their strategy is similar to a passive fund.
Passive management (or tracking) is gaining in popularity in the UK. In 2002 5.5% of assets under management were held in passively managed funds, by the end of 2014 this had increased to 10%. In the US this is 20% and it is expected that the UK will hit this level by 2020.
Passively managed funds effectively track an index, so for example the FTSE100 index, and rather than choosing between a good and bad stock it just buys the index. There are three main reasons why investors choose this route:
- Cost – at a base level passive funds can charge as little as 0.10% p.a. – actively managed funds can cost as much as 0.75% to 1% p.a. plus there are often additional trading costs
- Risk – what happens if the manager leaves, what about sector bias etc
- Flexibility – for an investor it is easy to make investment allocation decisions i.e. they want the UK they invest in a FTSE All Share Passive Fund etc
This update is different because it is not looking at one particular fund but an overall strategy but in the discussion with the managers at Legal and General it is worth investors considering whether passive management is the right route or a blend of both active and passive or active is the way forward.