Forget manager talent, go for a tracker fund
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Senior Writer
Jody Clarke Sep 12, 2008
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Most fund managers don’t beat the market. Indeed, last year only 25% of funds in the UK All Companies sector beat the FTSE All Share. In other words, you could have put your money in an exchange-traded fund (ETF), or an index tracker, and you’d have made a better return than most of the actively managed funds (AMFs) in the sector – for about a quarter of the management charge to boot.
Yet despite the dismal performance, fees on AMFs are rising. According to the financial consultants Defaqto in The Independent, around 7% of funds now have an annual management charge of 1.75% or more, compared to just 2% of funds nine years ago. Meanwhile, 59% of funds now have a charge of between 1.5% and 1.7%, compared with 50% in 1999.
This seems strange at a time when overall assets under management have risen in the past few years, from £3.1trn to £3.4trn today. Competition normally drives prices down. Certainly, that’s the way it seems to work in America. “It’s common for US funds to specify a clear reduction in fees as assets grow,” says Christopher Traulsen on Morningstar. He gives the example of Fidelity’s US unit, which divides the management fee for each of its funds into a basic fee and a group fee. The basic fee doesn’t change, but if the size of the group’s assets grows, the fees drop.
So why aren’t UK fees falling? Perhaps one reason is that in the US, at least 75% of a fund’s board members must be independent of the fund company. They’re charged to act in the best interests of investors and “must justify the fees, in writing, every year”, says Traulsen. But in Britain “fund holders have no one to argue their case – when it comes to fees, fund companies are in the ridiculous position of negotiating with themselves”.
So it’s no surprise to find that the median annual charge for AMFs in America is 0.67%, against 1.5% in Britain. That’s why you should invest via ETFs and trackers, rather than an AMF. As James Dixon, director of Evolve Financial Planning tells What Investment, “I’ve yet to see some academic research which actually supports active fund management, [but] I have seen plenty of research supporting trackers”. They boast sub-1% total expense ratios and, in the case of ETFs, are exempt from stamp duty. The best value All-Share tracker is Fidelity’s MoneyBuilder, with a total expense ratio of 0.3%. But given the parlous state of equities, you may be better buying precious metals with an ETF such as ETFS Gold (PHGP:LSE), which tracks the physical gold price, but charges a low 0.39%.
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