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.