Index trackers are significantly more popular in the IA UK All Companies sector than in any other Investment Association equity peer group, research by FE Trustnet shows, despite the view that this part of the market can be a successful one for active managers. 
Passive investing has witnessed a strong surge in popularity in recent years as investors become increasingly cost-conscious and unwilling to pay for the relatively high fees that are attached to active management.
Data from the Investment Association shows that tracker funds under management stood at £155bn as at the end of July 2017, taking their overall share of industry assets under management (AUM) to 13.7 per cent.
This is up from a 12.7 per cent share of Investment Association universe AUM in July 2016. If we go back 10 years, there was just £44.7bn held in index trackers, making up 7.5 per cent of total industry AUM.
Source: Investment Association
As the table above shows, the equity sectors tend to have a greater share of assets in passive products. Close to 18 per cent of equity fund assets are in index trackers, compared with 15.4 per cent for bond funds and just 8.4 per cent of multi-asset portfolios.
In order to get greater granularity on where investors are making the most use of index trackers, FE Trustnet examined the AUM of all funds in 15 Investment Association sectors and calculated what share of each peer group is currently invested in trackers.
When doing this, we only looked at ‘pure trackers’ that have a mandate to replicate an index as closely as possible and excluded those taking ‘enhanced index’ approach, which involves a limited degree of active management.
As the following table makes clear, the IA UK All Companies sector is the most popular area for index trackers as 34.6 per cent of its £176.2bn assets are held in passive products.
The IA North America sector – which is seen by many as a more ‘natural’ home for index trackers given the relative efficiency of the market – is in second place with 30.5 per cent of assets in trackers.
Three other sectors that are often thought of as being good hunting grounds for active managers – IA Japan, IA Europe excluding UK and IA Global Emerging Markets – also have more than the Investment Association average of 13.7 per cent in passive funds.
Source: FE Analytics
Simon Evan-Cook, senior multi-asset investment manager at Premier Asset Management, said the amount of tracker AUM in the IA UK All Companies sector could be the cause of some celebration, if it is down to investors dropping ‘closet trackers’ to move into cheaper, genuine passives.
“On one level, I'm not surprised to see trackers take a bigger slice of the IA UK All Companies sector. A study I did in 2014 showed there were way more closet trackers in this sector than any other. I suspect this is due to UK investors’ home bias, which is to say there are more unsophisticated investors in this sector,” he said.
“The cat is out of the bag on closet trackers now. They are being eaten away at the lower end by investors wising up, realising that if they're going to copy the market they may as well pay less to do so.”
The rise of trackers in the IA UK All Companies sector becomes more apparent when the size of individual funds and inflows are examined.
FE Analytics shows that six of the 10 largest funds in the peer group are index trackers. The largest member of the sector is the £10.7bn iShares UK Equity Index (UK) tracker, which pushes the active £10.6bn Invesco Perpetual High Income fund into second place.
Other trackers that are now among the largest members of the IA UK All Companies sector include the £6.7bn Vanguard FTSE U.K. All Share Index, £5.9bn Scottish Widows UK All Share Tracker and £5.8bn Royal London FTSE 350 Tracker funds.
When we look at inflows over the past year we again see the growing popularity of trackers as five of the 10 best-selling funds are passives: BlackRock ACS UK Equity Tracker, Vanguard FTSE U.K. All Share Index, Royal London FTSE 350 Tracker, iShares UK Equity Index (UK) and SSgA UK Equity Tracker.
Despite a glimpse of a silver lining in the increased use of trackers in the IA UK All Companies sector, Evan-Cook is surprised by it on another level.
Performance of average FTSE All Share tracker vs sector and index over 10yrs
Source: FE Analytics
“Investors hold US trackers because of the evidence of passive outperformance; in the UK it's in spite of the evidence,” he said.
“Quite simply, since Vanguard launched its All Share tracker in 2009, it has underperformed its sector average. This wasn't supposed to be possible. But it's a fact that's there for all to see if they are willing to see it.”
As Evan-Cook noted, the Vanguard FTSE U.K. All Share Index is currently underperforming the average IA UK All Companies member over one, three and five years. Since launch in December, it has lagged its average peer by more than 10 percentage points.
If we look at all 19 funds tracking the FTSE All Share, we also see that every one has failed to beat the average active fund over one, three, five and 10 years.
“This may be because the US market is more efficient or because it is much more broadly spread across industries than the All Share,” he said. “Both seem like good reasons. But either way it is fairly odd that proportionally more investors hold UK trackers than US trackers.”