Bill Jamieson: Injecting activism into passive investments

For many investors the prospect of hours of work researching which shares, bonds and funds to select '“ and with a bewildering range from which to choose '“ can be a turn-off.

Passive investments allow you to take part in the equity ride but without all the slog. Picture: PA
Passive investments allow you to take part in the equity ride but without all the slog. Picture: PA

Collective funds such as unit and investment trusts have already removed much of the hassle – and the paperwork – while providing professional fund management skills to run a portfolio of shares on your behalf.

But fund management charges and broker fees can nibble away at returns. And there’s still the task of trying to pick the winners from a multitude of funds. Hence the explosive growth in passive investment – investment vehicles that allow you to take part in the equity ride but without all the slog.

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The big players in passive investment are exchange-traded and “tracker” funds. Units in an exchange-trade fund (ETF) fund can be traded as if they were shares. The fund can hold equities, bonds, commodities. Most track an index, such as the FTSE All-Share or a bond index, with many now offering the opportunity to invest in particular areas such as emerging markets or subsectors of the main market. They have a three-fold appeal for investors: they are easy to buy and sell, the paperwork is minimal, and they are low-cost.

They are of course, not free from the fundamental objection that they further divorce the equity investor from the responsibilities that go with owning shares in a company. But few investors much bother with fiduciary duties that attach to the underlying shares in the funds they have selected, and in any event power has long gone from private investors.

ETFs were introduced in the US 23 years ago and there are now more than 1,800 different products covering almost every conceivable market sector. And they are increasingly popular in the UK. Latest Investment Association figures show UK tracker fund assets have hit a record £126 billion, equivalent to 12 per cent of all UK fund assets – nearly double the level a decade ago.

A post Brexit Citywire survey of five major fund supermarket groups looked at what ETFs have to offer and which are proving the most popular. The cheapest FTSE 100 and FTSE All-Share trackers offered by Hargreaves Lansdown are the Legal & General UK 100 Index Trust and UK Index Trust. The ongoing charge with these is just 0.06 per cent (platform costs not included).

The Citywire survey finds the more expensive HSBC FTSE 100 (charging 0.18 per cent) has sold more, closely followed by its FTSE 250 Index fund – this is also a “core tracker”, with a 0.08 per cent charge on Hargreaves, and 0.18 per cent elsewhere. The fund was also a bestseller at Charles Stanley, Tilney Bestinvest and the Share Centre.

Broadly, the more specialist the index, the survey found, the more expensive the passive fund which tracks it. For example, investors wanting to select an income-orientated tracker find they have to pay a little more than for tracking a mainstream index. The iShares UK Dividend Ucits ETF invests in 50 FTSE 100 and 250 companies with the highest yields. This has a charge of 0.4 per cent but is among the most popular passive funds for investors on Seltrade.

Emerging market ETFs have also seen a sales upsurge. The Citywire survey finds the best-selling passive fund is the BlackRock Emerging Markets Equity tracker. As a core tracker it costs 0.23 per cent on Hargreaves Lansdown (0.25 per cent elsewhere), and has returned 35 per cent over the last year.

There are specialist passive funds focused on a particular asset class such as gold and precious metals, technology and healthcare. These have proved popular since Brexit with ETF Securities’ Physical Gold in demand. It was a bestseller on Tilney Bestinvest since the EU referendum and is up 24.8 per cent this year.

Finally, there is multi-asset passive investing – funds that invest in a mixture of shares and bonds. Included among these are Vanguard’s LifeStrategy funds where the proportion between shares and bonds can be varied, enabling investors to switch from those with a higher equity exposure to ones more heavily concentrated on bonds as they near the time they need access to the money, such as retirement.

Many may prefer to keep closer track of their investments through a conventional unit or investment trusts. But ETFs are now earning a place in many portfolios as a “no fuss” option for investors seeking exposure but without the hassle.