Funds with ‘premium’ fees outperform cheap trackers

Fund investors should not make the mistake of disregarding active funds with ‘premium’ fees, according to new research. 

Number-crunching carried out by broker Chelsea Financial Services found that four of the top 10 performing funds in the Investment Association’s (IA’s) UK all companies sector over five years to 31 March have an ongoing charges figure (OCF) greater than 1 per cent. 

Top of the pile is Old Mutual UK Dynamic Equity (OCF of 1.07 per cent), which has returned 122.3 per cent over the past five years, to the end of March. It is closely followed by a fund with a more expensive price tag (OCF 1.28 per cent). But despite charging top dollar, CFP SDL UK Buffettology has delivered the goods, returning an impressive 121.7 per cent. 

In contrast, the best low-cost index tracker fund in the sector was iShares Mid Cap UK Equity Index, posting gains of 57.8 per cent. It has an OCF of just 0.17 per cent. 

Overall, out of the 238 funds in the IA UK all companies sector, only three funds with an OCF below 0.7 per cent won a place in the top 60 performers, which represent the top 25 per cent of the sector. The best-performing low-cost fund was Montanaro UK Income, with an OCF of 0.35 per cent. 

The three cheapest tracker funds, each having an OCF of 0.06 per cent, were middle of the pack. The iShares UK Equity Index fund was positioned in 144th place, having returned 36.8 per cent, HSBC All Share Tracker was in 151st place with gains of 36.2 per cent, and Fidelity Index UK was in 153rd place on 36 per cent. 

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Five-year total returns after charges (%)
OCF (%)
1 Old Mutual UK Dynamic Equity 122.30 1.07
2 CFP SDL UK Buffettology 121.65 1.28
3 MFM Bowland 120.05 0.90
4 Old Mutual Equity 114.18 1.10
5 Old Mutual UK Mid Cap 113.49 0.85
6 Slater Growth 102.83 0.78
7 Unicorn UK Growth 96.16 0.89
8 Slater Recovery 95.63 0.84
9 LF Miton UK Value Opportunities 93.96 0.89
10 Barclays Lower Cap 92.34 1.32

But, while a good number of active funds have earned their stripes over the past five years, when looking at the other end of the scale many have disappointed. This is evidenced by the fact that 34 of the 60 worst performing funds have an OCF of over 1 per cent. 

The research comes at a time when active fund managers are coming under increasing regulatory pressure. The Financial Conduct Authority has proposed a number of remedies to ensure fund managers offer investors value for money. 

As part of the changes, fund groups will be required to publish an annual report that sets out how they have provided value for money. In another change that has been introduced, fund firms must appoint a minimum of two independent directors to their boards.   

Elsewhere, the FCA has called on fund managers to communicate fund objectives more clearly and also to spell out whether the performance of a fund is limited in terms of how far its holdings can differ from the weightings of a benchmark index. 

Darius McDermott, managing director at Chelsea Financial Services, makes the valid point that basing fund choice decisions on cost alone will not lead to the best consumer outcomes. 

‘Buying the cheapest fund is not going to result in the best consumer outcome,’ he says. ‘Fund houses are now being given the opportunity to evidence how they add value for money, and it is essential that they get this right. A consistent way to show this value would be best, so that investors can easily assess the advantages and base their decisions on more than cost alone.’ 

As a broad rule of thumb, active funds typically quote an OCF figure of between 0.85 and 0.95 per cent. Therefore, those with a price tag of 1 per cent or higher are at the expensive end. Tracker funds, in contrast, can cost just a tenth of active funds – but investors should not make the mistake of thinking they are all cheap as chips

One of the worst offenders is Virgin UK Index Tracking, which has £2.8 billion in assets under management. The ongoing charge (OCF) is 1 per cent, and the fund returned 32.4 per cent over five years to the end of March 2018. When launched over two decades ago, the fund was heavily promoted by Richard Branson. 

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