British fund managers beware. Vanguard, the American firm that launched the first tracker fund in 1974, is planning to launch its own tracker on the London market. It’s hardly a radical departure, given that British investors can already invest in funds that “own everything and do nothing”, as Vanguard describes trackers. But it highlights the growing pressure on actively managed funds, which charge higher fees to manage your money from day to day.
Do these charges really matter? The short answer is, yes – a lot. Every penny you pay a fund manager to look after your money is a penny out of your returns – so the higher the charges are, the harder your money has to work. Look at these numbers from Motley Fool. Say you invested £100 a month for 30 years in a tracker, an actively managed fund and a fund of funds. Assuming a return of 5% a year from each, let’s suppose that the fees are 0.75%, 1.5% and 2.5% respectively, pretty typical for each class. That doesn’t look like a major difference. But in 30 years’ time, you’re left with vastly different final values. The tracker, the cheapest of the funds, will have returned £71,800; the actively managed one, £63,100; and the fund of funds £53,500. But the reason you choose an actively managed fund is so that the manager can use his skills to beat the market.
So surely the active fund should return more than the passive one, making up for the fees? Well, that’s the theory – and it might even be worth paying the fees if it were true. Sadly, plenty of data exist to suggest that you are in fact highly unlikely to pick a manager who consistently beats the market. According to Thames River research, just 10.6% of all unit trusts and Oeics have beaten their respective benchmarks in each of the past three years.
The good news is that it looks as though investors are getting the message that charges should be one of the main things they look at before they buy a fund. Net retail flows into trackers rose to £280m in the fourth quarter of 2008, reports the Investment Management Association. That’s the highest since 2002. We think it’s a bit too early to dive back into the market right now (although we like individual stocks). But investors who feel more bullish could consider the Fidelity MoneyBuilder UK Index fund, which tracks the FTSE All Share, and has a total expense ratio of just 0.30%.