Watch out for pricey tracker funds Which? research uncovers the costliest funds
22 September 2011
Tracker funds are supposed to be a cheap and simple way of investing in the stock market but new research from Which? has revealed that many of these passive investments are charging well over the odds.
While the likes of Vanguard, Fidelity and HSBC are all charging an annual management fees under 0.3% for funds tracking the UK stock markets, 47% of UK tracker funds are charging 1% or more.
Highest of these are the Co-operative FTSE4Good Tracker and the HBOS UK All Share Index funds, which charge 1.5% annually, over five times that of the cheapest funds available to investors.
High cost leads to poor performance
Collectively, the 14 high charging funds manage £7.7bn worth of investors' money. The HBOS UK All Share fund has £2.2bn under management, while the Virgin Money UK Tracking Trust and the HBOS FTSE 100 Index Tracking Trust look after £2bn and £1bn of investors' money respectively. Which? research estimates that these funds charging over 1% are raking in £89m a year in fees.
The knock-on effect of these high fees is that the funds do not closely track the stock market like they're supposed to. The HSBC FTSE 100 fund, with an annual charge of 0.25%, has paid out just 1% less than the FTSE 100 over the past year. The Lloyds Scottish Widows UK Tracker, which charges 1% per year, has returned 59% less than the FTSE 100, the index that it tracks.
|Weighing up the cost of tracker funds|
|The table shows the five cheapest and most expensive tracker funds that invest in the UK stock markets and their annual management charge (AMC). Also shown is much each tracker fund underperformed the stock market within which it invests between 30/8/2010 and 30/8/2011. Tracker funds will always underperform the stock market because of fees.|
|AMC (%)||How much underperformance?|
|The most expensive UK Trackers…|
|HBOS UK All Share Index Tracking Fund||1.5||23.9%|
|CIS UK FTSE4GOOD Tracker Trust||1.5||33.5%|
|HBOS UK FTSE 100 Index Tracking Fund||1||31%|
|Lloyds Scottish Widows UK Tracker||1||59%|
|Marks & Spencer 100 Companies Fund||1||46.7%|
|… and the cheapest UK Trackers|
|HSBC FTSE 250 Index Fund||0.25||10.5%|
|HSBC FTSE All Share Index Fund||0.25||2.9%|
|HSBC FTSE 100 Index Fund||0.25||1%|
|Vanguard FTSE U.K. Equity Index||0.15||2.3%|
|Fidelity MoneyBuilder UK Index Fund||0.1||5%|
But low fees don't always guarantee top returns
Which?'s research has found that low cost, however, doesn't always guarantee close tracking. The Prudential UK Index Tracker charges 0.5% a year but has underperformed the FTSE 100 by 60% between 30 August 2010 and 2011.
Which? Money investment expert Gareth Shaw commented: 'Tracker funds are a simple way to invest your money – you don't have the hassle of trying to pick the best fund manager, who may not always deliver good returns on a consistent basis. A good tracker fund should pay you almost exactly the performance of the stock market, something which many managers often fail to beat.
'However, not all trackers follow the markets as closely as you'd expect and cost is not the only reason for this. You should check not only the fees of your tracker fund but how well it does its job in tracking the stock market before you decide to invest.'