Passive tracker funds' overall share of total funds under management was the highest on record at the end of 2012 at £57.4bn, accounting for 8.7 per cent of the total, according to the Investment Management Association (IMA). The popularity of low-cost index-tracking funds such as trackers and exchange traded funds (ETFs) has grown in recent years, as investors disillusioned with poor performance for high fees look to alternative options.
Watch our video debate 'Are actively managed funds a rip-off?' on the merits of active vs passive funds, or read Chris Dillow's article on why investors struggle to beat the market.
The IMA also reports that funds that invest in other funds rather than individual securities such as equities (funds of funds) continue to have record-breaking assets under management and market share, of £71.2bn and 10.8 per cent, respectively.
Funds of funds are increasingly popular as an all-in-one investment solution as financial advisers realise they don't have the skills to effectively construct and manage portfolios. However, funds of funds typically have higher charges because they involve a double layer of fees - that of the fund and the underlying investments. This can result in total expense ratios in excess of 2 per cent.
"This is a huge drag on performance and means that funds of funds have to perform well just to stand still in real terms," says Patrick Connolly, certified financial planner at wealth manager AWD Chase de Vere. "Unfortunately, the vast majority of fund of fund managers don't have a secret recipe for picking the underlying investments that will perform the best and the result, after taking into account their hefty charges, is that most funds underperform. Good quality funds of funds are in the minority and many investors who have enough money to properly diversify their portfolio will be better off investing in individual funds."
But there are some funds of funds that do a good job of diversifying risk and have competitive charges. Mr Connolly likes Cazenove Multi Manager Diversity (GB0031537300), also an IC Top 100 Fund. He also singles out M&G Episode Balanced (GB00B1P9ZK31) and Fidelity Multi Asset Strategic (GB00B1M29V45).
These funds could suit investors with smaller portfolios who do not have sufficient assets to build up a diversified portfolio using individual funds, or who do not have time to allocate and want a buy-and-hold solution they do not have to monitor.
Funds under management at end of 2012 (£bn)
| 2012 | 2011 | |
|---|---|---|
| Fund of funds | 71.2 | 60.3 |
| Tracker funds | 57.4 | 42.3 |
| All Funds | 658 | 576 |
Source: Investment Management Association
