Flows into passive funds in Europe had their best year in 2016 and active managers need to respond to maintain their primacy according to Thomson Reuters Lipper.

Jake Moeller, head of Lipper UK & Ireland research at Thomson Reuters, said in a report this week that active funds have made up 92% of overall assets under management in Europe on average. However, this average has fallen since  2011 and last year was 88% of assets under management. Passive product providers in Europe had the highest flows in 13 years in 2016, despite total net flows reducing from 2015.

Moeller said it is difficult to assess all the drivers behind the growth in passive investing but relative performance and cost are key, together with the considerable increase in exchange-traded fund products and providers now available in the European market.

“Irrespective of the rationale, the last three years have undoubtedly been good ones for the passive fund industry in Europe. Indeed, 2016 represents the best year yet,” he added. “Whether this is a structural trend is difficult to say, but the onus is definitely on active fund managers to respond to this challenge if they are to maintain their primacy in the industry.”

In November last year the Financial Conduct Authority, the UK regulator, said in the interim findings from a study of the asset management market that there is limited price competition for actively managed funds. As a result investors often pay high charges which, on average, are not justified by higher returns. The FCA said: “There is stronger competition on price for passively managed funds, though the FCA did find some examples of poor value for money in this segment.”

Last month the European Securities and Markets Authority also highlighted the issue of closet indexing, where active managers stay close to an index. Esma reviewed 2,600 funds between 2012 and 2014 and found that between 5% and 15% of Ucits equity funds could potentially be closet indexers.

The European regulator said: “Esma is concerned the practice may harm investors as they are not receiving the service or risk/return profile they expect based on the fund’s disclosure documents while potentially paying higher fees compared to those typically charged for passive management.”

In addition, last year the global ETF/ETP industry grew faster than the global hedge fund industry according to ETFGI, the independent research and consultancy firm.

“At the end of 2016 assets invested in the global ETF/ETP industry were $530bn larger than the assets invested in the global hedge fund industry,” added ETFGI. “This is a significant achievement for the global ETF/ETP industry, which will celebrate its 27th anniversary in March while the hedge fund industry is 68 years old.”

ETFGI said a record $3.548 trillion was invested in 6,630 ETFs/ETPs listed globally at the end of last year as investors have become disappointed with the high fees, performance and lack of liquidity of hedge funds.