Investors charge into passives this Isa season

UK savers are favouring passive investments in the run-up to the close of the tax year, after a period of market turmoil saw them shun actively managed funds.

Retail investment platforms have reported that passive tracker funds, which aim to match an index’s performance, were dominating their top 10 lists of invested funds in the year-to-date for stocks and shares Isas.

AJ Bell said eight out of the 10 most popular funds invested in by its clients in the year to the end of March were trackers, with the exceptions of Fundsmith Equity, run by star manager Terry Smith, and Fidelity’s Global Special Situations funds.

“People want to get their money working in the market and could be using passive funds as a place holder,” said Laith Khalaf, head of investment analysis at AJ Bell. He said investors were seeking quick market exposure before making more focused investment choices.

Khalaf added: “It’s a push and pull between trackers being better priced and greater disillusionment with active funds.” 

Increased demand for passive funds is a sign of growing caution among retail investors, as they look to stay on top of market volatility and shrinking tax allowances.

Tracker funds experienced net inflows of £982mn in January, the most recent month for which data is available, according to the Investment Association, a trade group. This compared with £1.4bn in inflows across all retail investment funds in the month.

Fund supermarket Hargreaves Lansdown reported clients’ strong preference for passive funds, particularly among regular savers. Interactive Investor, a rival platform, said a single active fund featured in its top 10 list in the year to date, compared with four in the same period last year and nine in 2021.

Savers have grown disillusioned with active funds over the past decade, according to Khalaf. But he argued that they should be less dogmatic in their approach to different types of investment.

Some have suggested that active funds could come into their own as market volatility generates more opportunities for a strategic approach to investment. Savers have continued to show an interest in investment trusts, closed-ended funds which are actively managed.

Baillie Gifford’s Scottish Mortgage Investment Trust topped the list of popular trusts among several platforms, despite recent board upheaval over its growing exposure to private companies. Shares were trading at a 21 per cent discount on Friday, though hedge funds have pared back short positions in a sign they think prices are nearing the bottom.

“When discounts move out that’s an opportunity, especially if a trust has come out a long way versus its own history,” said Rob Morgan, an analyst at investment manager Charles Stanley. Morgan said investor sentiment was febrile, but investors were topping up on trusts they already held.

Investors have also switched holdings out of general pots into Isas, in a process known as “Bed and Isa”, with AJ Bell reporting a fourfold increase since the start of the year. The uptick came ahead of April’s scheduled halving of dividend and capital gains allowances.

Levels of cash held within stocks and shares Isas on most large platforms remained broadly similar to the same period last year, with investors opting to use investments to maximise the use of their tax-free allowance.