There is another reason for the growing emphasis on cost among investors, Source’s Chris Mellor, executive director in equities product management, explains. “If you look at what’s driving costs down, we are seeing lower fees in broad, basic vanilla ETF-type products, we’re also seeing pressure on active managers to reduce their fees and quite right.
“What’s driving that is the lower-return world in which we live. Expected returns are relatively lower and, therefore, costs become a much bigger part of your potential performance or the potential impact on your performance.”
Mr Mellor continues: “In a world where you’re getting 10 per cent in returns per annum, a 1 per cent or 1.5 per cent fee for an active fund is not too big. In a world where you’re getting 2 or 3 per cent per year if you’re lucky, then 1.5 per cent is eroding an awful lot of your returns – and that’s if you’re getting those sort of returns in the first place.”
But he insists cost is only one part of comparing active and passive funds. “Perhaps the most important question you should be asking when deciding on an investment is, ‘does this ETF deliver what I want in my portfolio, does it give me the exposure I’m looking for?’”
| Will more platforms start to offer ETFs? |
Simon Hynes, head of UK retail sales at Legal & General Investment Management, suggests: “I think ETFs will become more popular but, at the moment, IFAs have an access issue with some of the leading fund platforms not able to host ETFs just now. However, I think that will improve over the coming years. “The full wrap platforms have the ability to trade shares as well as funds, and ETFs and investment trusts can all be traded quite capably. But the old fund supermarket models that have become wraps or are in the process of becoming wraps have found it more difficult to host ETFs. “[There are] requests for it from ETF providers and increasingly from advisers; also robo-advice solutions tend to use ETFs. There’s pressure for ETFs to be more widely available.” |
As Amanda Rebello, Deutsche Asset Management’s head of ETF distribution, points out: “It doesn’t have to be a binary choice between passive and active. Some investors will focus on identifying when it makes sense to buy a lower-cost passive vehicle and when it makes sense to pay an active manager potentially higher fees to deliver a return above the benchmark.
“In reality, this perhaps does not put pressure on active managers to reduce fees, but rather to ensure they deliver outperformance versus the benchmark.”
