According to analysis conducted by BlackRock, the proportion of UK wealth portfolios invested in index funds and ETFs will grow by 50 per cent over the next two years, driven by four factors encouraging businesses and investors to re-think old habits.
BlackRock estimates that index funds and ETFs currently make up around 20 per cent of UK wealth portfolios today. The attributes that attracted early adopters are increasingly valued by a growing set of investors, catalysed by an industry in flux, the firm says.
It finds four key trends in the UK. The first is business model evolution, with BlackRock commenting that in the years since the Retail Distribution Review (RDR), the UK wealth management and IFA markets have gone through a once in a generation revolution. The amount of IFA assets on UK platforms being outsourced to discretionary fund managers and centralised investment propositions now stands around 50 per cent, the firm says.
In tandem, increased fee transparency under MiFID II is shining a light on exactly what people are paying for, which favours indexing and putting ETFs and index funds at the heart of portfolios.
The second trend is that active portfolios work harder with indexing – a more detailed understanding of returns and a drive towards efficiency is making investors question their habits, promoting wider recognition that active portfolios work harder with indexing, BlackRock says.
Investors are shifting their processes from traditional security and fund selection to holistic portfolio construction and are using tech-based analysis to inspect portfolio return drivers, and whether the components interact cohesively to drive towards the intended outcome. Acknowledging that broad market exposure and factor tilts drive up to 90 per cent of portfolio variance, more and more investors are seeking increasingly elusive returns by blending alpha-seeking, factor and index strategies, ignoring outdated active vs passive mindset, the firm says.
“We are also seeing a shift towards greater indexing and a search for true alpha. Replacing benchmark ‘hugging’ alpha funds with index funds and ETFs can create more room and budget to focus on true alpha and alternatives where investors remain happy to access strategies at a premium.”
Thirdly, the engine behind digital wealth management. Blackrock writes that as robo-advice and digital wealth management move into the mainstream and make investment accessible to more people than ever, indexing is often the hidden engine – providing the building blocks for portfolios that can be scaled to accommodate different investment styles and efficiently adjust to asset growth.
Finally, BlackRock believes that UK platforms are well set-up to provide access to index funds, with many working to establish the capabilities to efficiently trade ETFs as well. “This latter development will open a new level of choice for investors looking to build cost efficient portfolios,” the report says.
Joe Parkin (pictured), Head of iShares UK, says: “We’ve reached a pivotal moment in the UK investment story. There is growing recognition that many of the habits and processes that have got us to where we are today have become outdated and won’t meet the needs of clients in the future. The investment industry is beginning to stir and respond, and while change won’t happen overnight, the direction of travel is clear and irreversible.
“Our role as an investment provider and partner is to equip our clients with the best tools possible for building efficient and cost-effective portfolios, irrespective of the wrapper they choose.”
Bill Vasilieff, CEO at Novia Financial, comments: “We are seeing a growing demand on our platform for indexing from both advisers and DFMs including ETFs and mutual funds. Investors are increasingly focused on understanding the characteristics of what they hold within their portfolios, and how the different components interact to deliver a specific outcome. The transparency of holdings and choice of exposure that indexing provides means they are fast becoming an important ingredient in portfolio construction.”
Gareth Johnson, Head of Digital Channels and Investment Solutions at Brewin Dolphin, says: “Seven years on from RDR, helping our clients reach their goals has involved evolving our proposition to the changing dynamics in the market. More advisers than ever are outsourcing their discretionary portfolios and, with a greater focus on costs, it is increasingly important to scrutinise drivers of portfolio returns. This is not about active vs passive, it is about having access to the broadest range of strategies so that we can meet the needs of our clients, or clients of advisers, more efficiently. Index strategies are an important and growing part of the mix in helping us achieve that.”
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