ESG fund sales treble, but have we reached Peak Passive?

by | Feb 4, 2021

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  • Responsible fund sales trebled in 2020, to £10 billion, according to Investment Association data published this morning
  • Five years of outflows for UK equity funds, totalling £16.4 billion
  • Funds under management now sit at a record high of £1.4 trillion
  • Retail investors ploughed £30.9 billion into funds in 2020, up from £10 billion in 2019
  • Are we approaching Peak Passive? Tracker fund sales level off

Laith Khalaf, financial analyst at AJ Bell, comments:

“The tale of 2020 gets weirder and weirder, as more data emerges showing the big disconnect between markets and the global economy. Investors pumped huge amounts of money into funds over the course of the last year, despite the pandemic laying waste to global economic activity.

“There are two main reasons for investor optimism. Economic performance has been dented by the voluntary actions of international governments, and a strong recovery is expected when those artificial restrictions are lifted. The second reason is loose monetary policy. Low interest rates have given investors nowhere else to go apart from the stockmarket to get a real return on their money. So goes the story of the last 12 years.

“The lion’s share of equity flows went into the global sector over the course of 2020, and flows were particularly strong at the tail end of the year, which is likely a vote of confidence from UK investors in the election of Joe Biden as US President. Meanwhile UK equity funds continue to struggle to get anyone to touch them with a bargepole. For the fifth year on the trot, money gushed out of UK equity funds, to the tune of £2.8 billion in 2020, and £16.4 billion since the beginning of 2016. It remains to be seen whether a successful vaccine roll out arrests the declining popularity of the UK sectors in 2021.

“Active funds also had a good year in 2020, accounting for 40% of net retail inflows (yes, that does count as a good year nowadays). Investors placed £5.2 billion into active funds in December, compared to £926 million into tracker funds. The combined popularity of both active funds and global funds probably spells out two familiar names in the sand – Fundsmith and Lindsell Train.

“In 2020, passive funds failed to match previous inroads into investor portfolios, despite the strong outperformance of the US equity market, which makes up the majority share of global index tracker funds. The proportion of assets under management accounted for by passive funds crept up to 17.8%, from 17.5%. That compares with 15.8% in 2018 and 14.7% in 2017. In the vernacular of the day, the curve of passive fund sales appears to be flattening. This raises the question of whether we may be approaching Peak Passive.

“Passive funds have been on a tremendous run, so it’s natural to expect growth to plateau at some point, particularly seeing as the passive price war seems to have abated. Ten years ago passive funds made up just 6.9% of assets under management, compared to 17.8% today. Only time will tell if the passive party has run out of steam, but the picture in 2021 might be muddied. That’s because ETFs will be included in Investment Association sectors from April, which will bump up the passive numbers, without necessarily reflecting underlying flows.

“The limelight appears to have shifted away from passive funds towards ESG investments in the last year, with responsible funds recording a phenomenal year for fund sales. Indeed the rising tide of cash flowing into ESG funds may also be playing a part in the shift back towards active funds, as this is an area where active managers dominate, for the moment at least.

“The ESG trend is likely to continue for the foreseeable, after huge numbers of fund launches in recent years. Given the strong performance of these funds in 2020, it’s also likely that committed green investors are being joined by fund buyers simply looking to make good investment returns, given which way the geopolitical winds are blowing.”



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