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Is the passive surge slowing?

A healthy year for stocks is often positive for fund sales and 2020 was no exception. Investment Association (IA) data shows that UK retail investors put a net £30.8bn into funds last year, the second highest sum in a decade. With the exception of a £9.7bn net withdrawal amid the extreme turbulence of March, they kept putting money to work every single month of the year.

Where exactly did all that cash go? Global equity funds were unsurprisingly popular, as investors looked for a broad source of market exposure. The sector’s sales figures were likely propped up by the enduring popularity of Terry Smith's flagship fund, too. Elsewhere, some accelerating trends started to take on a more concrete appearance in the data: responsible investment funds took in a stunning net £10bn last year, compared with just £3.2bn in 2019. As previously discussed, 2020 may go down as the long-awaited ESG (environmental, social, and corporate governance) tipping point.

This is all well documented, but what’s more interesting is the sign of a pause in one of the investment world's biggest narratives. Passive funds have been taking up an ever greater chunk of the market in recent years, with their share of the assets monitored by the IA increasing from 6.9 per cent at the end of 2011 to 17.5 per cent as 2019 drew to a close. Jack Bogle's revolution is truly marching ahead. Yet this momentum faltered in the second half of 2020: having hit 18.4 per cent at the end of June, passive's share then proceeded to fall back slightly, settling at 17.8 per cent by year end.

As AJ Bell analyst Laith Khalaf asks, have we finally reached “peak passive”? To my mind the active/passive debate has always been about how much you have of each rather than a case of either/or, no matter what some people say. But perhaps we are approaching the limit of investors' passive allocations. That, or they are simply turning more to stockpickers in uncertain times.

Either way, we shouldn't call an end to the passive frenzy just yet. To start with, IA figures do not currently account for exchange traded funds (ETFs) – something that should be amended this year. Huge swathes of ETF money, old and new, should shift the balance.

And then, in other senses, passive investors have appeared to be a hardy bunch. Calastone data notes that investors have been selling out of active funds in a turbulent January 2021. Non-ESG active equity funds were “pummelled” in terms of investor withdrawals. And yet passives barely broke their stride. Even as some investors panicked, index trackers took in nearly £500m of inflows for the month, in line with the average of recent years.

What does this tell us? It’s just a snapshot, but it suggests passive investors might be more resilient than those individuals who back stockpickers – something that makes sense, given the 'buy and forget' nature of index investing. It could also reflect a tactic sometimes used by professional fund buyers, to simply buy a tracker as a stopgap while struggling to decide where to invest. With no clarity on which style or sector might dominate 2021, a tracker is a good enough place to park your money.

Either way, the end of the passive boom, and all that this means, may not be upon us just yet.