Investors could soon be getting a better deal
Let me put my cards on the table straightaway. I am a big fan of unit trusts and open-ended investment companies (OEICs). I always have been and always will be, essentially because I can think of no better way in which to invest in equities or bonds.
These vehicles provide underlying diversification and are managed by professionals who spend their working lives dissecting and analysing markets. In other words, unit trusts and OEICs are perfect for investors wishing to build long-term exposure to stock or bond markets and who do not necessarily have the time or inclination to observe their investments at close quarters.
Yet being a fan of these collective investment vehicles does not mean I think everything is right. Far from it. I believe it is high time the managers of these funds gave investors like you and me an improved deal. Too many unit trusts and OEICs remain far too expensive.
Go back 20 years and you would have paid 5% initially and 1% annually to have your money managed in a unit trust.
Today, the initial charge can usually be avoided if you invest via a discount broker such as Interactive Investor or Hargreaves Lansdown (great news of course). But the typical annual management charge is now close to 1.7%.
The reason it's so high is because there are many mouths to feed – that of the manager running the fund, the company operating the platform through which the fund is bought and the adviser who recommended the fund in the first place and who needs to be fed on an annual basis. And, unsurprisingly, it's investors who end up paying for this feeding frenzy. The result is that more of your long-term wealth is nibbled away by charges. Given the awful economic backdrop and uncertain stockmarket conditions (not just here in the UK but worldwide) it doesn't smell right – and it isn't right.
If anything, charges should now be reduced so as to encourage more people to invest or to continue investing. And one more thing to remember: this rise in annual management charges has occurred despite big chunks of the fund management industry failing to deliver on their promises to investors and beating the stockmarket indices they set out to outperform.
Thankfully, there are moves afoot to ensure the investment industry gives investors a better deal. Fund management group Vinculum has just launched a fund (Vinculum Global Equity) that promises to levy only a 0.25% annual management charge if it fails to deliver performance in excess of its stockmarket benchmark – the Morgan Stanley Capital International World Total Return Index. The idea is that investors will not pay over the odds for underperformance but Vinculum will share in some of the spoils if it outperforms.
It's a great fund idea and a charging structure that other investment groups should take up. As Vinculum founder Nigel Legge says: "There are an awful lot of things about our industry that investors are beginning, justifi ably in my opinion, to rail against – unfair pricing, underperformance due to human error, the overly hubristic trading culture and much more besides. We are looking to shake things up a bit, put these things right and offer investors real value for money."
Vinculum is a step in the right direction as is the launch of a campaign by investment house SCM Private to get all managers of investment funds to provide a full breakdown of all the fees incurred in the running of their funds.
Alan Miller, head of SCM Private, says such disclosure industry wide would ultimately lead to investment costs being reduced for consumers as investment managers focused on reducing the total cost of investing in order to remain competitive.
Let's hope Vinculum and SCM Private are both successful in their quests to give fund investors a better deal. We deserve it.
All investment returns are measured against a benchmark to represent “the market” and an investment that performs better than the benchmark is said to have outperformed the market. An active managed fund will seek to outperform a relevant index through superior selection of investments (unlike a tracker fund which can never outperform the market). Outperform is also an investment analyst’s recommendation, meaning that a specific share is expected to perform better than its peers in the market.
A collective investment vehicle (known in the US as a “mutual” or “pooled” fund) and similar to an Oeic and investment trust in that it manages financial securities on behalf of small investors who, by investing, pool their resources giving combined benefits of diversification and economies of scale. Investors buy “units” in the fund that have a proportional exposure to all the assets in the fund, and are bought and sold from the fund manager. The price of units is determined by the value of the assets in the fund and will rise or fall in line with the value of those assets. Like Oeics (but unlike investment trusts) unit trusts and are “open ended” funds, meaning that the size of each fund can vary according to supply and demand of the units form investors. Unit trusts have two prices; the higher “offer” price you pay to invest and the “bid” price, which is the lower price you receive when you sell. The difference between the two prices is commonly known as the bid/offer spread.
Open-ended investment companies are hybrid investment funds that have some of the features of an investment trust and some of a unit trust. Like an investment trust, an Oeic issues shares but, unlike an investment trust which has a fixed number of shares in issue, like a unit trust, the fund manager of an Oeic can create and redeem (buy back and cancel) shares subject to demand, so new shares are created for investors who want to buy and the Oeic buys back shares from investors who want to sell. Also, Oeic pricing is easier to understand than unit trusts as Oeics only have one price to buy or sell (unit trusts have one price to buy the unit and another lower price when selling it back to the fund).
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
A standard by which something is measured, usually the performance of investment funds against a specified index, such as the FTSE All-Share. Active fund managers look to outperform their benchmark index. Cautious fund managers aim to hold roughly the same proportion of each constituent as the benchmark, while a manager who deviates away from investing in the benchmark index’s constituents has a better chance of outperforming (or underperforming) the index.
Annual management charge
If you put money in an investment or pension fund, you’ll not only pay a fee when you initially invest (see Allocation Rate) but also a fee every year based on a percentage of the money the fund manages on your behalf. Known as the AMC, the actual percentage varies according to the particular fund, but the industry average for active managed funds is 1.5%.
This is more usually a feature of car insurance but it can also crop up in contents, mobile phone and pet insurance policies. An excess is the amount of money you have to pay before the insurance company starts paying out. The excess makes up the first part of a claim, so if your excess is £100 and your claim is for £500, you would pay the first £100 and the insurer the remaining £400. Many online insures let you set your own excess, but the lower the excess, the more expensive the premium will be.