Recent research from Money Marketing has shown that some investors are paying way over the top for high cost tracker funds.
In fact the three highest charging UK tracker funds have over £1.5 billion invested in them and investors are paying over £12 million more in charges compared to the average cost for a tracker fund.
This type of investment could be seriously damaging to your wealth.
What are high cost tracker funds?
Let’s take a step back for a moment and remind ourselves what tracker funds are.
When you invest, if you don’t want to buy shares directly in a listed company like Tesco for example, you will usually buy units in a fund that invests in lots of different company shares.
There will be different funds for different geographical areas of the world like UK, US, Europe etc and also different funds for different sectors of the economy like large companies, retail, technology etc.
Active funds aim to outperform the market they are in and will charge more for doing so. Tracker funds (also known as passive or index funds) aim to deliver the market return by following what the market does.
Typically because there is less work involved in running tracker funds they will charge considerable less than active funds.
A word on active vs trackers.
In the main, most active funds underperform the market over the long term and the main reason for this? Costs. A lack of consistent outperformance combined with the drag of higher costs creates a high hurdle for active managers to overcome.
Now I am not saying that there are no active managers that can beat the market, it’s just incredibly hard to identify them in advance.
Tracker funds keep things simple. After all, if it’s extremely hard to beat the market why bother and why pay more?
The real skill in superior investment performance comes from building an appropriately diversified portfolio that is low cost, evidence based and builds in key themes.
Our own flagship RTS Investment Strategy is not only low cost, but also uses over hundred year’s worth of stock market data to pick out the key themes that drive returns. We encompass value investing, meaning we are investing in sectors that look cheap. We protect the portfolio from high inflation using inflation liked investments and we also use lower risk investment assets to protect your portfolio when stock markets fall.
We have so much data we can share in terms of actives vs trackers and our own RTS Investment Strategy as well as our RTS Extreme and RTS Ethical strategies, so please get in touch if you want to know more.
Now, let’s get back to the scandal of these high cost tracking funds.
The offending high cost tracking funds
So we know low cost funds tend to beat high cost funds and we know tracker funds should be low cost.
The average cost for a UK tracker fund looked at by Money Marketing is 0.41% per annum. Meaning 0.41% of your invested portfolio would be deducted in fund management fees every year.
But in fact there are many funds charging much less than that.
Investment manager BlackRock have a UK tracker fund that charges just 0.01%!
So why on earth do the likes of Santander, Halifax, Janus Henderson and Scottish Widows charge over 1%?
Santander, being the worst offender, charges 1.50%. This is a higher charge than most active funds!
What’s sad is that due to the size and brands of these companies, many people will have their pensions invested in these funds and will be oblivious to the returns (and extra retirement income) they are missing out on by paying the higher charges.
If you know anyone in this situation then please point them our way so we can explain what’s going on and what they need to do to recapture control over their retirement.
We are currently offering a free portfolio review worth £497 and also offer a free 15-minute initial consultation via the telephone or online where we can help you understand where you are and point you in the right direction to move forward.
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.