Analyst: Vanguard

The UK retail fund industry has evolved cushy total expense ratios (TERs) of 163bps for equity funds as an asset-weighted average, according to the data provider Lipper. In the more mature US market, the equivalent measure is 91 bps – an astonishing discount.

Analysts have long puzzled over this discrepancy in fee levels. The most obvious reason why UK funds are more expensive is that the industry remains highly fragmented, with no provider accounting for more than 7 per cent of the market. In the US, just four companies share the bulk of funds under management – none of which, bar Vanguard, are players in the UK (Fidelity International operates separately from its Boston-based namesake, Fidelity Investments).

Vanguard is now capitalising on its vast scale in the US – it has $1.4trn (£79bn) under management globally – to offer UK consumers a basic FTSE All-Share tracker at a total expense ratio of just 15 basis points – nearly half the cost of the next cheapest tracker and a mere tenth of the price of most active funds.

This is one of 11 indexed funds launched by the company on June 23 this year, the most expensive of which, the emerging markets equity tracker, costs 55 basis points. It has been a popular story with the media and the Vanguard brand is now widely associated with cheap trackers.

What is less well-known but potentially even more disruptive, however, is that the company also offers its US clients active management by the likes of M&G, Schroders and Baillie Gifford at, on average, 28 basis points. Tom Rampulla, managing director of Vanguard UK, now has plans to roll out an active range over here late next year or in early 2011.

He does not promise rates as low as in the US, as negotiations with managers have not yet begun and the company would not be able to supply the same volume of assets, but says they would be "competitive".

Advisers have reason to believe this claim is more than the usual sales patter. Not only has the UK tracker range shown a striking commitment to keeping expenses as low as possible, but Vanguard’s whole philosophy is also based around the principle of economy. It is not a plc run for shareholders who want to keep margins high but a mutual organisation – like building societies or the Co-operative Group – owned by its clients. Any profits are either reinvested in the business or used to reduce total expense ratios, Mr Rampulla claims.

The UK managing director, a loyal 'Vanguardian' who has worked for the company for 22 years, says he is unlikely to launch any active funds before late next year because other plans are a more urgent priority.

First, he intends to complete any gaps in the core passive range, which might include small-cap funds or index-linked bonds. "There are a couple of basic building blocks we don’t have yet. Do you cut up the market more than just the All-Share? Is it important for advisers and investors to have the FTSE 100, the FTSE 250 and the small-cap index? That’s some work we have to do," he concedes.