Will 2012 be the year low cost actives dominate?

Could 2012 be the year low cost active funds emerge as a savvy way to keep charges down, or will they be exposed as a get-out clause for managers trying to gain space in the post-RDR world?

This year saw the rise to prominence of the low cost active fund. HSBC, JP Morgan, Schroders and Fidelity have been among the first big groups to launch suites of cut price actively-managed products.

Fund houses have said the ranges offer investors a lower-risk, transparent alternative to passive investing which aims to outperform the market by around 1% – the best of both the active and passive worlds.

But with the launches have come warnings the funds entering the market are not viable options for investors because of their low return targets.

As advisers and fund managers look for ways to cut the costs of investing ahead of the RDR, when the price of advice is expected to rise, will 2012 be the year of the low cost active investment?

The adviser/DFM split

Dr Markas Gilmartin, partner at Epoch Wealth Management, backs the use of low cost actives by advisers who have discretionary permissions. But for most, Gilmartin believes the lack of tactical asset allocation and reliance on passive underlying components outweighs the cost benefits.

“If you have discretionary powers the use of low cost funds in active asset allocation is a sensible way of controlling costs for clients and giving fast, diversified exposure to an asset class,” he said.

But for Gilmartin, in an advisory capacity, the focus on underlying passive investments in low cost actives outweighs the cost benefits when compared to full active funds.

For Gilmartin, multi-asset funds offer a better solution. He said funds offered by the likes of Ruffer and Miton – after the fund manager rebate - have TERs approaching 1%, an extra cost of no more than 0.75%. He said this more than offsets the potential performance given up by a focus on passives.

An active asset allocation approach using passive funds would also be hard for advisers to administer, since it will require client agreement for every portfolio change, he said.