Are you paying too much for your funds?

Published by Andrew Pitts on 16 November 2010.
Last updated on 17 November 2010

shocked investor

When investors pay active funds managers to put their money to work, they expect to see their money grow. Far too many private investors, however, suffered a "lost decade" in the equity markets.

Sure, most developed stockmarkets have yet to surpass the peaks they reached at the turn of the millennium, but on a total return basis (in other words, with dividends included but not reinvested), the FTSE All-Share Index was up 23% over the decade.

However, the retail prices index was up 31% over that period, so investors have still suffered a loss in real terms.

Have active fund managers done any better?

Recent research from Lipper FMI shows they have - the average core equity fund (excluding more specialised funds) is up 31%, with net income reinvested.

Hurrah! But what you don't know is that the average core equity fund actually grew by 53.8%, before annual charges were deducted. That means investors received back only 57% of the average gain over 10 years.

What's more, these figures don't take into account any initial charges that most investors paid, so you can knock several more percentage points off the end return.

These average figures, across the industry, look disappointing, but there are extremes at either end of the range, on both an individual fund and a group basis.

Funds like BlackRock and JP Morgan, on average, performed very well and investors got back more than 70% of the underlying gains before charges were deducted.

But investors in the average AXA and Henderson funds received just 8% of the underlying gains, or about 1% in actual returns.

Individually, the best core equity fund was Fidelity Special Situations, which returned 196% before charges. Investors who have stuck with Gartmore UK Growth, on the other hand, have seen the fund's pre-charges loss of 12.6% turned into a post-charges loss of 26.5%, a multiple of 2.1 times.

The upshot of all this is that UK-based open-ended funds continue to charge their customers more than funds in any other country in the developed world for active management - and that has to change.

If you're paying for something that you're not getting, consider a lower-charging options instead, such as am exchange traded fund or an investment trust. Annual charges on core investment trusts are generally around half those of open-ended funds.

Andrew Pitts is the editor of Money Observer magazine

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