The news today that Schroders plans to launch a low cost actively managed UK equity fund is bound to prompt renewed debate about the cost of passive and active funds.
The Schroders UK Core Fund is due to be the first in a series of low cost UK Equity funds managed by Richard Buxton’s UK equity team.
It aims to have an annual management charge of 0.35% with a total expense ratio (TER) of 0.4%.
The fund itself aims to generate a return of 1% per annum after fees over the FTSE All Share index return. Of course this performance is not guaranteed.
It follows the launch of the J.P. Morgan UK Active Index Plus fund earlier this year and we expect to see more of these lower cost active funds come to the market this year and next. They might be better described as ‘passive-plus’ funds.
These funds are being launched in response to a number of things.
Passive funds are growing in popularity and tend to have very low annual management charges. We recently wrote about the growth in Exchange Traded Funds (ETFs) and these funds typically have charges in the region of 0.15-0.4%.
There is also a drive towards greater transparency when it comes to fund charges, prompted by the introduction of the FSA’s Retail Distribution Review at the end of next year.
Investors (and some advisers, such as Informed Choice) want to know where fund charges are going.
Using a typical actively managed fund with a 1.5% annual management charge as an example, this charge is usually allocated 0.75% to the fund manager, 0.25% to the investment administration platform and 0.5% to the financial adviser.
We believe that it is important that investors know where these charges are going, to enable them to work out if they are getting value for money.
When considering the cost of investing money, it is essential to compare like with like. This means looking at the cost of fund management without the cost of an administration platform or advice.
It would be easy to look at the 0.35% from the new Schroders UK Core Fund and think it was incredibly cheap when compared to a UK Equity fund with a 1.5% AMC. Once we strip out the administration and advice cost from the 1.5% AMC, to compare like with like, the annual management charges we should be comparing are 0.35% and 0.75%.
Cost is definitely an important factor when making decisions about the components of your investment portfolio, but you should not let cost dictate your fund selections.
Our approach to the delivery of investment advice always considers costs, but we remain neutral when it comes to the use of passive and active strategies; both can have a place in an investment portfolio.
The current weighted annual management charge of a Moderate Model Portfolio we might recommend to our clients is 0.523%, before the cost of an investment platform and our charges for advice.
Knowing that we can deliver investment portfolios with competitive charges like this puts us in a very strong position to spend time working with our clients on the really important elements of investment advice; including linking portfolio decisions to financial goals and understanding attitude towards investment risk, reward and volatility.
