Why are investment funds so popular?
Sales of investment funds have gone through the roof this year, as investors increasingly ditched cash to chop and change between bonds and equities.
Total net retail sales hit £18.7 billion during the first nine months of 2009, according to the Investment Management Association (IMA). This is more than the total sales achieved in the whole of 2000, which previously boasted the highest annual sales on record.
Equities took over from bonds as the most popular asset class during the nine months to September 2009, with net retail sales of £1 billion. The absolute return sector was the best-selling sector, taking over from corporate bonds after 10 months at the top.
The record figure for 2009 comes after September became the sixth consecutive month in which sales topped £2 billion. August also saw the sales for the month ever.
The figures suggest that, although the UK is still officially in recession, investors continue to be tempted back into the stockmarket.
The £2.7 billion net sales witnessed in September is a stark contrast to what was happening in September 2008, when investors sold holdings as quickly as possible - net sales were a depressing minus £29.4 million.
"Investors are showing an increasing interest in equity funds, after a period in which bonds have dominated," says Richard Saunders, chief executive of the IMA. "The geographic spread is wide, with significant flows into funds investing other than in the UK."
Investors are also dipping their toes back into bricks and mortar; property funds saw net retail sales hit £261 million in September, more than double the £129 million achieved in August, and the highest since June 2007.
Elsewhere, new research published by IMA on fund management costs and performance found that the actual cost of investing in the average UK tracker fund is broadly similar to the published total expenses ratio (TER). This, the organisation says, contradicts claims that funds are subject to large hidden charges.
'"The cost of investing in tracker funds came out lower than the TER over 10 years, whereas if there were hidden costs you would expect the actual costs to work out higher," IMA said in a statement.
It also found that costs did not drag down performance for actively managed funds. Over the last 10 years the average actively managed UK all companies fund performed better than the FTSE All Share index after charges.
"This means that the impact of the investment choices made by fund managers has more than offset the costs involved."
Martin Bamford, managing director of IFA firm Informed Choice, says it is a myth that funds are subject to large hidden charges. The obsession with charges has partly been driven by the passive funds lobby, he adds.
"They are almost evangelical in the belief that passive is the only way in which to invest," Bamford explains. "In reality, much of the academic research they rely upon to justify their arguments is flawed and not a fair comparison with the active management approach."
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%.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
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).