Private investors are seeking passively managed index trackers as 2023’s ISA season roars, with passive strategies eight of the most popular ten funds for January and February in best buy lists at online brokerage AJ Bell. We speak to AJ Bell’s head of investment analysis, Laith Khalaf, to find out why.
In this blog:
- Private investors are favouring passive trackers in ISA season
- Inclination towards US index, the S&P 500
- Investment trust investors opting for mish-mash of strategies
- Share investors favouring UK blue-chip stocks
Laith Khalaf, head of investment analysis at AJ Bell, comments:
“It’s shaping up to be the ISA season of the tracker fund, with eight of the most popular ten funds being passively managed. In the same period last year, active funds ruled the roost, with only one passive fund making it into the top ten.
“What’s driving this trend is less clear. It may be that investors are simply keen to get their money to work in the market. Rather than spending time researching active funds, they are plumping for a passive placeholder, with a plan to revisit their investments when they have a bit more headspace. The poor recent performance of some hitherto high-flying global growth funds, most notably from the Baillie Gifford stable, may also have caused investor confidence in active funds to falter. Nonetheless, Fundsmith Equity and Scottish Mortgage retain their dominant spots in the table, despite also suffering weak performance in the last year or so. Active performance as a whole has been weak recently, with only 27% outperforming a passive alternative, as AJ Bell’s Manager versus Machine report showed.”
“Fund investors are also displaying an inclination to the S&P 500, and it may be that this regional allocation goes hand in hand with a belief that active managers will find it hard to outperform in such a widely watched market. Or perhaps investors are now used to trimming their household budgets in the face of inflationary pressures, and they have started to apply the same logic to their investment portfolio, turning away from active funds to cheaper trackers instead. Whatever the reason, it seems clear passive funds are very much the flavour of this ISA season.”
“Trust investors have been buying a bit of a mish-mash of strategies, ranging from global growth to equity income to infrastructure. There are no longer any tracker investment trusts, so the question of active versus passive strategies is moot in this arena.”
“Share traders are largely buying UK blue chips in their ISA portfolios, which is pretty par for the course. The benefit of wrapping these dividend-paying companies in an ISA will soon be even more keenly felt by investors, seeing as the tax-free dividend allowance will be halved to £1,000 from April, then halved again to £500 from April 2024. Dividends received above this allowance are now taxed at 8.75%, 33.75% or 39.35%, depending on whether investors are basic, higher or additional rate taxpayers, so that ISA protection could be extremely valuable for a portfolio of UK shares.”