Asset managers lose out to ETFs

Fund managers are getting "ETF'd", the head of sales at Ignis told the FT this week. The asset management business is going the same way as food retail. Bargain retailers Lidl and Aldi are going great guns, as is Waitrose at the top end of the market. The middle, Sainsbury's and Tesco, is getting squeezed.

Similarly, fund managers are increasingly split between a few large providers of cheap, passive index trackers such as exchange-traded funds(ETFs) at one end, and smaller, active players at the other.

This means that most of us will have to change the way we choose our investments. Previously, independent financial advisers and fund supermarkets such as Hargreaves Lansdown, Cofunds, Transact and Skandia channelled the larger part of investors' savings into actively managed funds, based on past performance, perceived manager skill and commission offered by fund groups.

ETFs and other tracker funds that don't pay kickbacks were either missing from these platforms or offered with extra fees, making them unattractive. But times are changing; shortly before Christmas, Hargreaves Lansdown started to offer some of Vanguard's index trackers.

But access to indexing is only part of the story. Private investors' views are changing too. They're no longer thinking: how can I get Anthony Bolton to invest my money in China? Now they're wondering: where can I buy a cheap European equity value strategy?

Investors are realising that part of what active fund managers have sold as skill can be replicated cheaply through so-called market factors'. These common drivers of returns, such as value, growth, momentum and volatility, are increasingly offered in packaged formats by index firms and providers of passive funds.

This is good news for savers as it means a long-overdue cut in the costs of saving. Active management won't go away, and nor should it. But the core vehicles for long-term savings will be based on a low-cost, systematic, indexed approach, combined with a variety of factor tilts'.

Examples of such factor ETFs' are the FTSE RAFI trackers from Invesco Powershares, which screen shares by four accounting measures (book value, dividends, sales and cash flow); or Ossiam's newly launched minimum variance funds on UK, European and US shares, which target low-volatility stocks.

Paul Amery edits www.indexuniverse.eu , the top source of news and analyses on Europe's ETF and index-fund market.