Tracker fund costs set to hit new low
The arrival of nearly a dozen ultra-cheap tracker funds could see the cost of these investment vehicles hit a new low.
Index tracker funds have always had a reputation for being a low-cost way to follow the market. Most UK providers charge annual management charges between 0.3% and 0.5%, while, in comparison, actively managed funds typically charge around 1.5%.
Now, with the arrival in the UK market of 11 new ultra-cheap trackers from the US giant Vanguard, the price war seems set to hot up again. The most expensive Vanguard fund is the Emerging Market Stock index, with an annual management charge of 0.55%; the cheapest is the UK Equity, costing just 0.15%.
Vanguard funds are not currently widely accessible to smaller private investors, because the minimum direct investment is £100,000; however, you can buy them through the Alliance Trust fund supermarket with a minimum £100 investment, and other supermarkets may follow in due course.
Nonetheless, other fund groups are responding to the tracker pricing challenge. HSBC has been the first to cut the charges on its seven tracker funds for UK investors to just 0.25%, with effect from September, and experts think others will take the same route in this competitive market.
But as Adrian Lowcock, senior investment adviser at broker Bestinvest, points out, trackers are not necessarily the best bet in the current market.
“Active managers who were overweight in financial and commodity stocks have done very well recently, but trackers can’t go overweight because they’re designed to follow the market accurately," he explains. "Good managers have also been looking for undervalued companies that will outperform over the longer term. Again, trackers don’t have that option.”
Lowcock sees a place for ‘strategic’ use of trackers – for example in the heavily researched US large cap market, where it’s very difficult for active managers to find bargains. “Some investors do like trackers, and for them low cost is crucial – but over the longer term, a good active manager is likely to outperform a tracker,” he says.
Also known as index funds, tracker funds replicate the performance of a stockmarket index (such as the FTSE All Share Index) so they go up when the index goes up and down when it goes down. They can never return more than the index they track, but nor will they lose more than the index. Also, with no fund manager or expansive research and analysis to pay, tracker funds benefit from having lower charges than actively managed funds, with no initial charge and an annual charge of 0.5%.
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.
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%.