Savings beat the soaring stock market

You’ve heard the FTSE’s hit a record high. But what fund mangers DON’T tell you is . . .

THE FTSE 100 has finally forced its way to a new high, ending a 15- year wait to rescale the heights reached during the technology bubble.

Some fund managers were keen to stress that, thanks to dividend income, investors had actually done quite well through that time. Yet nothing could be further from the truth.

Those who invested their money with an elite group of skilled managers might have made eye-popping profits, but millions with pensions and Isas invested in index-tracking or similar funds at the turn of the century have barely made a penny on their money.

Indeed, those who held £10,000 in basic index-tracking funds could be almost £2,000 worse off once i nf l ati on and charges have taken their toll.

In many instances, savers might well have fared better in the best fixed-rate bonds offered by banks and building societies.

More than £74 billion is now tied up in trackers, although the proportion of money in these funds was smaller in 1999.

Let’s look at the facts about how the stock market has done. Analysis by Axa Wealth shows that a £10,000 investment in the FTSE 100 at the end of 1999 would now be worth £16,778.

That might sound fine but it is actually less than 3.5 pc growth every year. Sadly, investors won’t have received even this because their profits will have been plundered for fees and charges.

The cheapest trackers take around 0.5 pc a year in total charges, but some grab more. So the real rate of return on a FTSE 100 tracker will have been less than 3 pc a year at best. And 3 pc just happens to be the average rate of retail prices inflation over the past 15 years.

Investment firm Hargreaves Lansdown says the average FTSE 100 tracker fund will have turned £10,000 into £14,609 with dividends reinvested. That’s around 2.6 pc annual compound growth.

But charges can make an enormous difference, even with a tracker.

While HSBC’s cheap FTSE 100 tracker would have grown to £14,679 with a fee of 0.27 pc, Halifax’s expensive UK FTSE 100 tracking fund would have reached £13,536 with its fee of 1 pc — an annual growth rate of just 2.04 pc.

You would need to have made £15,478 for your savings to have maintained their value after i nflation i s taken i nto consideration. So, after 15 years with the Halifax tracking fund, you could be almost £2,000 worse off.

Funds tracking the wider FTSE All Share index have done a little better. Legal & General’s tracker rose to £17,730, with a fee of 0.56 pc. Here again, charges can make a huge impact. The more expensive Virgin Index Tracking fund rose to only £ 15,318, according to Hargreaves. This has an annual fee of 1 pc.

Some investors are in so-called closet trackers. These funds ape the FTSE index to a large extent but charge a lot more. Others will have been in badly r un f unds, with poor performances year after year.

Despite this, because they claim to be actively managed, they have been taking fees of around 2 pc a year from your Isa or pension — which might have reduced returns to 1 pc a year.

This is particularly likely if you were sold a fund run by or for your bank. For example, Scottish Widows UK Growth fund, widely sold to Lloyds Bank customers, would have grown to just £13,828 according to Morningstar data analyst. That is about 2.2 pc growth every year.

In fact, those with money to invest would have been better sticking to cash, particularly as in 2008 the best fixed savings rates topped 7 pc before tax.

By investing in a series of decent f i xed- rate bonds, a basic- rate taxpayer could have turned £10,000 into more than £18,200. And if they had their money in tax-free cash Isas, they could have accumulated close to £19,700.

Yet not everyone who chose the stock market 15 years ago is a loser. Fund manager Neil Woodford was out of favour when he refused to be seduced by the technology boom, but those who trusted him are undoubtedly winners now. The Invesco Perpetual Income fund, which was until last year run by Woodford, would have turned £10,000 into £ 47,654 — a return of 376 pc according to Morningstar.

And Fidelity’s Special Situations fund made 383 pc, coming out with £48,238. Carl Stick, who took over Rathbone Income on January 1, 2000, has delivered a 261 pc return to his investors, turning £10,000 into £36,100. And what if you’d stuck with t hose technology f unds that were so popular at the turn of the century?

Laith Khalaf, of Hargreaves Lansdown, says: ‘ A l ot of t hem have mer ge d , or have disappeared altogether.’ Investors who were seduced by the tech boom and have held on have been sorely let down. The average fund turned £10,000 to £9,346, according to the Investment Association’s Technology and Telecom’s sector.

And tracker fund Close FTSE TechMark made £336 to stand at £10,336. That’s quite a recovery considering how far some fell in the early years of the century.