Bestinvest identifies £6.1 billion of UK tracker funds where investors could slash annual costs by at least 2/3rds13 March 2013
Interest in index tracking funds is gathering pace with the Investment Management Association (IMA) recently reporting that their share of overall industry funds under management is now at the highest level on record (8.7%) and that does not even include the booming market in Exchange Traded Funds. Yet new research by Bestinvest, the investment adviser and wealth manager, has highlighted the incredible disparity in costs being levied between the saints and sinners in the retail index fund market.
Bestinvest has identified the chasm in annual expenses between the cheapest and most costly funds which track the FTSE All Share Index as a range of 0.15% - 1.5%, a staggering difference of 10 times.
We name the key offenders
While in some cases high expenses are impacted by tiny fund sizes, Bestinvest has nevertheless identified eight retail UK index funds which each have over £100 million of assets, including one of the biggest retail index tracker (Virgin UK Index Tracking) that have annual costs that are highly uncompetitive in today’s tracker market. Ranked by size, these are:
|Fund||Index followed||Size (mill)||Annual Costs|
|Virgin UK Index Tracking||FTSE All Share||£2,368||1.00%|
|Legal & General (N) Tracker Trust - A||FTSE All Share||£1,174||1.15%|
|SWIP Foundation Growth A||FTSE All Share||£715||1.13%|
|Aviva Investors UK Index Tracking||FTSE All Share||£606||0.93%|
|Scottish Widows UK Tracker A||FTSE All Share||£408||1.00%|
|Halifax UK FTSE All Share Index Tracker C||FTSE All Share||£366||1.50%|
|Marks & Spencer UK 100 Companies||FTSE 100||£284||1.00%|
|Legal & General UK 100 Index R||FTSE 100||£202||0.80%|
In contrast, Bestinvest point out that competitively priced alternatives include the HSBC FTSE All Share Index fund and the Vanguard FTSE UK Index GBP*.
Bestinvest argues that while there are different techniques used between index funds, such as full-replication of every share in the index or holding a representative sample, overwhelmingly the main factor that will lead to different performance outcomes between funds with essentially the same automated strategies is going to be the impact of charges.
Jason Hollands, Managing Director of Business Development & Communications at Bestinvest, commented: “The popularity of tracker funds is down to a combination of disillusionment with the record of fund managers being able to add value and an increased focus on costs. Trackers offer investors the allure of following general market movements at much lower costs than funds which employ managers and analysts to try and beat the market. In our view there is a place for these funds in a portfolio yet they are not a panacea. And some clearly do not offer great value for money.”
“Despite the highly commoditised nature of these funds, the breadth of fees being levied is now simply incredible,” said Hollands. “In our view there is no point sticking with an index fund like Virgin’s which has uncompetitive fees when you may be able to switch to an almost identical fund from the likes of HSBC with a fraction of the costs. The list of funds we have identified, suggests that investors with combined assets of £6.1 billion could potentially cut their costs by at least two-thirds by switching into lower cost providers.”
Ben Seager-Scott, Senior Research Analyst at Bestinvest, added: “The market for passive investments in the UK is heating up partially because more advisers are prepared to use them in a post-RDR world where commission bias has disappeared. The emergence of exchange traded funds and the appearance of Vanguard, a major US index player, on the UK scene have also helped fuel a price war amongst passive providers which is clearly good news for investors. If you want to capture market beta at low cost, rather than seek to outperform there is no need to be paying more than 0.4% per annum in fund fees for a tracker or ETF. What our research does clearly show is that despite these strategies being passive, it is still important to be active in your fund selection when choosing an index fund.”
*The commission-free “C” share class of the HSBC FTSE All Share Index fund has 0.15% annual expenses as does the Vanguard FTSE UK Index GBP fund. However, Vanguard also levy a 0.5% initial fee. Both funds may incur platform or custody charges. However, a commission paying version of the HSBC FTSE All Share Index fund, the Retail share class, is available without custody charges via Bestinvest Select with annual costs of 0.27%.
- ENDS -
The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. This article does not constitute personal advice. If you are in doubt as to the suitability of an investment please contact one of our advisers.
Founded in 1986, Bestinvest was a pioneer of helping clients reduce the costs of investing through discounting commissions. Today Bestinvest has grown into a leading private client adviser which helps over 50,000 investors. Bestinvest offers a range of services including guidance, investment advice, financial planning and discretionary portfolio management all of which are underpinned by a commitment to rigorous investment research. Through its low cost Select service, Bestinvest offers execution-only investors a Self-Invested Personal Pension Plan (SIPP), Individual Savings Account (ISA), Junior ISA (JISA) and Investment Account with access to more than 2,000 funds as well as investment trusts, shares and Exchange Traded Funds. Bestinvest has won numerous awards including ‘Self-Select ISA Provider of the Year 2011’ and ‘UK Wealth Manager of the Year 2011’ as voted by readers of the Investors Chronicle and Financial Times and Investment Adviser of the Year 2012 at the Professional Adviser Awards. Headquartered in Mayfair, London, Bestinvest
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