Fund charges keep falling
The cost of investing has fallen dramatically over the past decade as technology, a push for transparency and the rise of cheap tracker funds combine to push down fees. It’s now possible to buy a global share portfolio, including the investment platform’s fee, for less than 0.5pc annually.
Here are the main factors driving down the cost of your investments.
Far more of the investment process has become automated – run by complex algorithms and simply overseen by humans.
The daily rebalancing of a typical “passive” fund that tracks the market is now almost entirely autonomous. “Active” managers, who select shares rather than follow the market, benefit too, in large part from the ability to screen huge numbers of stocks quickly, at minimal cost.
For both active and passive managers, the actual process of investing has also become more efficient.
Platforms are saving investors significant amounts too. It is now possible to invest in almost any fund through a low-cost platform without a substantial initial fee – which used to be standard in investing.
There is an enormous push for active fund managers to be more transparent about the fees they charge. Investors can now easily compare funds’ fees and performance online, and awareness of the importance of fees is growing. The Financial Conduct Authority last year released a damning report that concluded that active fund fees were too opaque and tended to “cluster” around price points. It suggested that managers use an “all-in” fee to make it even easier to compare costs. If implemented, this would increase the pressure to reduce fees further. However, some portfolios will naturally have higher costs if they invest in niche assets such as hedge funds. Third Point Offshore Investors, for example, the Guernseybased hedge fund trust, charges a 2pc management fee, plus a performance fee.
3. The rise of tracker funds
The focus on fees and the underperformance of many active managers has driven more investors towards low-cost “passive” investing – tracker funds.
As more money flows into passive funds, their economies of scale grow and as a result they get cheaper.
Passive funds have a choice of competing indexes to track, but the only real way for them to differentiate is on price. If an asset manager offers the cheapest tracker fund for a popular region or sector it can attract large amounts of money.
The number of active funds available means that active managers have greater competition too. The technological gains mentioned previously have lowered the barriers to entry in asset management.
Amid an increased number of providers, and with so much attention focused on fees, price is one area that can be used as a selling point.
Third Point Offshore Investors, a hedge fund trust based in Guernsey, above, charges 2pc a year. Left, Holly Mackay