Is Your ‘Actively Managed’ Fund Following An Index But Charging A Premium?
A recent investigation conducted by the UK’s Financial Conduct Authority (FCA) has come to the conclusion that British investors have £109 billion tied up in ‘closet tracker funds’ that are overcharging them on fees. The
An index is a collection of companies grouped together by an index creation company such as
Index trackers simply invest in all of the companies that make up an index and with the same weighting. Weightings can vary from index to
Some zero-fee index trackers have even recently been launched by providers such as Fidelity. Their strategy is to take a small loss on basic products and make money from investors elsewhere, such as through brokerage fees.
Several studies, including an extensive piece of research conducted by fund data and research company Morningstar that assessed the performance of 9400 Europe-domiciled funds between 2008 and 2018, have demonstrated that a minority of active funds actually beat the index they are benchmarked against. The Morningstar study found that fewer than 25% of actively managed funds beat their index.
One example given is that of the Scottish Widows UK Growth fund. It invests mainly in large cap UK companies with the stated aim of beating the FTSE All-Share index. It charges investors an annual 1.46% management fee. A passive fund tracking the index can charge as little as 0.1%.
The FCA measurement of a ‘closet tracker fund’, is one that exhibits a performance tracking error from the benchmark of less than 1.5%. The Scottish Widow’s fund’s is 1.37%, indicating its make-up is very close to that of a passive tracker. But for the price of a management fee that is more than 1% higher per year.
Closet trackers appear to be a growing problem. In 2016 the European Securities and Markets Authority estimated as many as 15% of the retail funds offered to everyday investors could be ‘closet trackers’ charging unjustifiably high fees.
How do you tell the difference? A good clue to compare the performance of an actively managed fund to that of the benchmark it is trying to beat over several years. If it is almost identical, the fund might well be a closet tracker. Another indicator will be if the fund’s top 10 holdings closely correlate to the companies with the largest weightings in the benchmark index.
Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.
There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.