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Investors across Europe and the United Kingdom who bought index trackers instead of funds run by stockpickers have saved nearly £80 billion ($141 billion) in fees over the past 12 years, putting more pressure on the actively managed fund industry.

According to research by asset manager Vanguard, investors have saved about £77.4 billion ($136.7 billion) in European domiciled funds since 2011 by opting for passive investments over active funds.

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The research, based on data from Morningstar, is another blow to active funds as customers continue to withdraw their money in favour of cheaper index trackers. U.K. savers took £136 million ($240 million) out of active funds in May, according to the latest data from the Investment Association, an industry body. In contrast, index trackers attracted £2.1 billion ($3.7 billion).

Stephen Lawrence, head of indexing research at Vanguard, said that “index funds have introduced significant competitive price pressure to the industry, benefiting all investors … There are plenty of skilled managers out there, but the benefits of their skill can be swallowed up by costs.”

The huge shift out of active funds and into passives over the past decade has partly been driven by fees. Vanguard, which sells both active and passive products, has been a beneficiary of this trend as one of the largest providers of index trackers globally, along with BlackRock and State Street. Vanguard manages US$378 billion in European passive products, and US$8 billion in active funds.

Vanguard calculated the figures by multiplying the amount of money held in passive products by the difference between the active and passive fees.

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Passive products, which comprise index trackers and exchange traded funds, provide returns based on an index such as the FTSE 100. Most trackers have annual fees of less than 0.5 per cent.

Active funds are more expensive as they rely on a manager to select stocks or bonds, in the hope that they will beat the index and deliver better returns than a passive product. Charges tend to range from 0.5 per cent to 1.5 per cent, according to Morningstar — although some are even more expensive. The average fee for an equity passive fund in the U.K. is 0.17 per cent, compared with the average active fee of 0.81 per cent, Morningstar said.

However, one of the reasons many investors have been withdrawing from active funds is that returns have been lacklustre and have even underperformed cheaper tracker funds.

According to a new report by investment site AJ Bell, just a third of active equity managers beat passive funds in their sector in the first half of the year. The same proportion of active equity funds — 35 per cent — outperformed over the past decade.

“The more investment that flows into passive funds, the more money is allocated to companies purely based on their size, and while that has been a winning trade for the past 10 years, it won’t strike most people as a foolproof way to pick winners,” said Laith Khalaf, head of investment analysis at AJ Bell.

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Although active fund managers have a hard time beating well-researched developed market indices, such as the S&P 500 of stocks in the US, they have an edge in lesser-known areas.

AJ Bell’s research shows that 62 per cent of managers investing in Asia ex-Japan have so far this year beaten the index, while 49 per cent of global emerging markets managers have beaten their counterparts.

“In extremely efficient markets such as the U.S., it is very hard to consistently beat the index, therefore keeping costs low is more of a priority,” said Ben Yearsley of consultancy Fairview Investing.

“However, in less efficient or more diverse markets, the opposite is true. In areas like emerging markets, small caps, or even corporate bonds, I think active management is more appropriate.”

The returns of some passives, such as those that track the S&P 500, might also be dominated by a handful of stocks. Analysts point to how just five large tech companies fuelled nearly half of the S&P 500’s returns in the first half of the year.

© 2024 The Financial Times Ltd

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