Passive funds grow faster than active rivals

Britain’s open-ended fund management industry is growing increasingly passive and at a faster rate than the global average, figures suggest.
Just under 30 per cent of open-ended funds domiciled in the UK follow the performance of the stock market rather than trying to beat it, according to estimates from Morningstar Direct, the web-based research platform. That compares with 19 per cent five years ago. Open-ended passive funds are said to make up 24 per cent of the global total, excluding China and India.
Passive funds have risen in popularity because they are much cheaper than their active rivals, with annual management fees that typically are priced at less than a single percentage point.
More than three quarters of actively managed, sterling-denominated UK equity funds failed to beat the FTSE 100 share index in the year to the end of June 2023, according to a report by S&P, the data company. On a global basis, 95 per cent of funds failed to match the market.
Even Warren Buffett, one of the world’s best-known stockpickers, said in 1993: “By periodically investing in an index fund, for example, the know-nothing investor can actually outperform most investment professionals. Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb.”
The cheapest way to invest in a passive strategy is via an exchange-traded fund, or ETF. Including these funds, about 30 per cent of money invested in Britain was passive, compared with 29 per cent in Europe and 52 per cent in the United States, Morningstar said.
Last year the amount of assets invested in American passive funds reached $13.3 trillion, according to Morningstar, beating the $13.2 trillion invested in active funds for the first time.
Some market-watchers have warned that the rise of passive investing can lead to bubbles. While active investors take a view on the valuation of the companies they own, passive investors allocate new money into companies based on their size. Critics argue that passive funds may be responsible for the high concentration of the S&P 500, the American benchmark, with the top ten stocks being worth roughly a third of the index.
Shares in some of London’s biggest fund management houses have suffered in recent years. Schroders has lost more than a third of its market value in the past five years, with Peter Harrison, its chief executive, saying in July that the UK asset management sector had become a “deeply unfashionable place”. Rivals such as Liontrust Asset Management and Abrdn similarly have suffered, with their shares sliding by 26 per cent and 44 per cent, respectively, in the same period.