Almost nine in 10 financial advisers believe investors do not understand the risks associated with UK-based passive
funds, according to new research from Ignis Asset Management.
The research, conducted in early April and based on more than 220 responses, reveals that 87 per cent of advisers believe UK investors fail to fully appreciate the risks posed by funds that passively track the FTSE 100, due to the handful of individual stocks and sectors that dominate the index.
More than a half of advisers (57.5 per cent) said passive funds were “somewhat riskier” than investors realised, while a further 29.9 per cent stated they were “significantly riskier” than typically acknowledged.
Moreover, the research reveals that, contrary to widespread expectations, the FSA’s Retail Distribution Review (RDR) is unlikely to prompt advisers to significantly increase their clients' exposure to passive funds.
More than two-thirds of advisers (68.3 per cent) said they expected their current usage to remain the same, with 9.5 per cent planning to actively reduce their usage. Just 22.2 per cent of advisers said they would increase their clients' exposure to passive funds - and only 6.8 per cent by a “significant” amount.
Although the RDR is set to have a negligible impact on passive funds, the vast majority of advisers do believe forthcoming regulation will exert pressure on “closet trackers” - actively managed funds that display little deviation from the market.
Finally, in a warning to the industry, almost three-quarters of advisers (72.7 per cent) stated that fund groups who were prepared to tolerate long-term middling performance from their fund managers would struggle to retain third party assets (client investments via IFAs) in future.
"Conventional thinking has been that passive funds would explode in popularity following the RDR but our research clearly questions that premise said Commenting on the findings, Rob Page, Ignis Asset Management.
“Indeed, advisers are more concerned that investors in FTSE 100-based passive funds do not fully appreciate the risks they are taking by tracking an index so heavily skewed towards a handful of sectors and mega stocks.
"For
fund groups committed to quality active management the news is more encouraging, as most advisers believe quality high alpha managers are more likely to generate superior performance in the long run. But it is clear that the time is up for fund groups that charge active fees for benchmark hugging returns."
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