The world’s biggest fund is run by a computer; A Vanguard “passive” fund, which simply aims to match the performance of the US stock market, has become the largest fund in the world
November 8, 2013 Leave a comment
The world’s biggest fund is run by a computer
A “passive” fund, which simply aims to match the performance of the US stock market, has become the largest fund in the world
6:30AM GMT 07 Nov 2013
For the first time a “passive” fund or “tracker” has become the world’s largest fund. Since 2008 the title has belonged to respected bond investor Bill Gross, the head of Pimco. Gross’s Pimco Total Return fund has $247.9bn of assets, but has lost $37.5bn so far this year as a large number of investors have moved away from bonds in favour of shares. Investors have rushed for the exits amid concerns that an earlier than expected interest rate rise could hurt bonds.The Pimco fund has been usurped by the Vanguard Total Stock Market Index fund, which aims to replicate the performance of the US stock market, as opposed to beating it. The fund, which was launched in 1992, now has $251bn in assets.
The fund can be bought only by US investors, but Vanguard also has a similar version for British savers – the Vanguard US Equity Index fund.
The fund’s popularity has soared in recent years, as has “passive” investment more generally. Passive funds are typically much cheaper than traditional funds, as there is no need to pay a professional to manage your money. For instance, a tracker fund might charge 0.25pc where an “active” fund might charge 1.7pc. In the case of Vanguard Total Stock Market Index fund, investors need to pay only 0.17pc a year.
Therefore the tracker fund, in theory, always lags the index by 0.25pc a year. Active fund managers, by contrast, need to beat it by 1.45pc to justify their higher fee – and many fail, which is why thousands of investors prefer investing in passive funds as opposed to funds run by a human.
According to the fund trade body, the Investment Management Association, just over £70bn of money is tied up in tracker funds in the UK, which represents 9.6pc of total funds under management. In contrast in the US over 25pc of fund investments are run by a computer instead of a fund manager.
Adam Laird, a passive investment specialist at broker Hargreaves Lansdown, said he expected more and more British investors to back passive funds in the coming years.
“Passive funds are most integrated in the US but this is a global trend and the UK is catching up. Trackers are becoming ever more a part of retail investors’ portfolios as the star fund managers retire and investors look for the simplicity and low costs that some tracker funds offer,” said Mr Laird.
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