Low-cost tracker funds achieve record market share

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Passive investment gains popularity to pinch more of the investment market than ever before.

Investors are shunning active fund management and plumping for low-cost tracker funds like never before. According to figures from the Investment Management Association (IMA) tracker funds now equate for 8.7pc of the private investor market a record high.

A tracker aims to mirror or "track" the performance of any of a number of worldwide stock market indexes, such as the FTSE 100 (FTSE: ^FTSE - news) . They can be bought and sold like any other unit trust or Oeic via a fund platform.

They are particularly effective in the more efficient or developed stock markets such as the S & P500, the major equity index covering US companies. Given the level of analyst coverage on companies within this index, it can be very challenging to find active managers who consistently outperform.

The downside to trackers mean that due to fees, however marginal, you will never beat the index and are exposed to 100pc of any market falls.

Mark Till, head of personal investing at Fidelity said passive investments are attractive because they tend to be cheaper, but not all trackers are priced the same.

"But many investors pay over the odds for passive investments because they are unaware how much the alternatives cost," he said.

"It is absurd to over pay for a tracker fund when there are many lower cost funds. For each tracker fund, there are often cheaper alternatives. When it comes to passive investments cost really should be an important factor in the decision making process.”

He recommends investors use a comparison site such as Compareyourtracker.co.uk to ensure the best value for money.

Multi-manager funds, in which an asset house creates a portfolio-like composite of funds for the investor have also achieved a record market share of 10.7pc.

Jason Hollands of BestInvest said that the increased use of these product classes is due to the Retail Distribution Review.

"Many firms of financial advisers have migrated away from building client portfolios themselves and are instead “outsourcing” this task through use of multi-managers funds making these ever more important gatekeepers to the funds market," he said.

"In our view the market share for these products is likely to grow further."

However, he warns that trackers are not a panacea they work well in some markets and at particular points in the cycle but are not always going to be the best solution.

"A tracker is only as good as the index it tracks with the UK FTSE 100, for example, essentially being heavy play on oil & gas and financials. Even a broader All Share Index fund won’t give you much exposure to the several hundred smaller companies in the index and on AIM," he said.