Avoid sky-high fund costs
SAVERS must keep a close eye on investment fund charges, otherwise fees can eat up most of the profits.
If you are not careful, fund managers can make more money from your pensions, unit trusts and equity Isas than you ever do.
Concern over high charges is driving people to invest in low-cost index trackers such as exchange traded funds (ETFs), which passively follow a chosen stock market whether it rises or falls.
Investors are shunning actively managed funds, where a well-paid manager builds a portfolio of assets in a bid to outperform the wider market. While the best managers such as Terry Smith at Fundsmith Equity can thrash the market, three quarters routinely underperform, yet charge a high price for failure, through fund management charges.
The Financial Conduct Authority has warned that actively managed funds fail to outperform benchmarks after costs. It said that £20,000 invested in a high-charging FTSE All-Share fund could be worth £14,439 less after 20 years than if invested in a low-cost fund, even if performance was the same.
ACTIVE FIGHTBACK
That appeared to seal the argument in favour of trackers, but Patrick Connolly, certified financial planner at Chase de Vere, has produced new research showing that over the past decade, leading tracker funds from BlackRock, Fidelity, HSBC and Legal & General have consistently produced below average performance.
He found that over five and 10 years, tracker funds covering the UK, Europe, Asia and Japan were all below par. Connolly says: “An active management approach is still able to outperform, despite significantly higher charges.”
The sole exception was the US, where passive funds are hard to beat and active managers have always found it difficult to outperform.
Connolly admits that too many actively managed funds “charge too much and deliver too little” but insists the best can still do the job.
IN THE CLOSET
Cavendish Asset Management director Cronan MacMahon agrees that the best active managers can outperform by taking risks and using their stock-picking skills.
However, the biggest mistake is to leave money sitting in an active fund with a mediocre manager, who does not even attempt to beat their benchmark.
These “closet trackers” still charge high fees, despite inferior returns. He says: “You would do better to switch to a passive product in the same sector.” Many closet trackers are sold by banks and building societies, so check if you have any.
“Identify that handful of talented managers who can outperform,” MacMahon adds.
MIX AND MATCH
Justin Modray, head of Candid Financial Advice, recommends using ultra low-cost trackers for the major stock markets where outperformance is difficult, such as the US and the FTSE 100.
He adds: “You could use an actively managed fund for UK or US smaller companies, or specialist sectors such as technology, commodities or global property.”
Rutherford Wilkinson is one of the growing number of IFAs that charge a fee for advice, then recommend a portfolio of low-cost trackers across a balanced range of shares, bonds, cash and property.
Operations director Trevor Clark says higher charges unquestionably erode your gains: “This is why active managers will continue to lose market share to passive managers.”
Sean Hagerty, head of European business at tracker fund specialist Vanguard, would like to see an industry “health warning” to alert investors to the dangers.