The Growth of Indexing in the UK

Indexing in UK wealth portfolios is set to grow by 50% over the next two years*.

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. You may not get back the amount originally invested.

• BlackRock believes that UK indexed assets will grow to $0.5trn
• This will make up 30% of total UK managed assets

*Source: BlackRock, June 2019.

Four trends at play:

1. Business model evolution – In the years since the Retail Distribution Review (RDR), the UK wealth management and IFA markets have gone through a once in a generation revolution. The amount of IFA assets on UK platforms being outsourced to discretionary fund managers and centralised investment propositions now stands around 50%1. In tandem, increased fee transparency under MiFID II is shining a light on exactly what people are paying for, which favours indexing and putting ETFs and index funds at the heart of portfolios.

2. Active portfolios work harder with indexing – A more detailed understanding of returns and a drive towards efficiency is making investors question their habits, promoting wider recognition that active portfolios work harder with indexing:

• What’s in your portfolio?: Investors are shifting their processes from traditional security and fund selection to holistic portfolio construction and are using tech-based analysis to inspect portfolio return drivers, and whether the components interact cohesively to drive towards the intended outcome.
• The true sources of return: Acknowledging that broad market exposure and factor tilts drive up to 90% of portfolio variance, more and more investors are seeking increasingly elusive returns by blending alpha seeking, factor and index strategies, ignoring outdated active vs passive mindset.2
• Use the whole toolbox: We are also seeing a shift towards greater indexing and a search for true alpha. Replacing benchmark ‘hugging’ alpha funds with index funds and ETFs can create more room and budget to focus on true alpha and alternatives where investors remain happy to access strategies at a premium.

3. The engine behind digital wealth management – As robo-advice and digital wealth management move into the mainstream and make investment accessible to more people than ever, indexing is often the hidden engine - providing the building blocks for portfolios that can be scaled to accommodate different investment styles and efficiently adjust to asset growth.

4. Growing choice of wrappers – UK platforms are well-suited to the index funds, with many working to establish the capabilities to efficiently trade ETFs as well. This will open a new level of choice for building cost efficient portfolios, irrespective of their preferred wrapper.

1Source: NextWealth 2018, Shape of Flows report

2Source: Gary P. Brinson, L. Randolph Hood, and Gilbert L. Beebower [1995]. Determinant of Portfolio Performance ;

Available at: https://www.cfapubs.org/doi/pdf/10.2469/faj.v51.n1.1869