Actively managed funds shunned by investors because of their higher cost, on average returned 8 per cent more over three years than their cheaper, more popular peers.
FE analysed 385 UK equity funds across the Investment Association UK All Companies, UK Equity Income and UK Smaller Companies sectors, finding higher charging funds performed better, even after these costs were taken off returns.
Funds with ongoing charges of more than 0.75 per cent – which includes 90 per cent of funds on those sectors – on average delivered returns of 24.96 per cent over three years.
This compared to 17.14 per cent for those charging less than 0.75 per cent.
The 0.75 per cent charge is significant because research published by FE last week suggested more than a fifth of advisers and investors miss out on the better returns because they ignore funds with ongoing charges above that threshold - which is the vast majority of actively managed investments.
But Lee Robertson, chartered wealth manager of Investment Quorum, said far too many active funds are charging a premium for a ‘quasi-tracking’ approach.
“Such funds therefore lack any real opportunity to outperform the markets or index which is a big claim made by active managers for their extra fees.”
By dismissing the sub-section of funds charging more than 0.75 per cent, FE argued investors were missing out on some of the most best performers, including the £1.2bn Standard Life Investments UK Equity Income Unconstrained fund.
It has an annual charge of 1 per cent, but has returned nearly 31 per cent over three years, consistently outperforming the IA UK Equity Income sector, which has returned 17.2 per cent.
Responding to the poll, Jacqueline Lowe, head of UK wholesale at Standard Life Investments, emphasised the company has a range of funds which all have different price points.
“We conduct regular reviews across our whole fund suite to ensure that our charging structure remains consistent and competitive within the market, and also offers value for money to our investors,” she said.
“As active managers, the best way to serve our customers is to maintain a key focus on performance - delivering value is ultimately what is important.”
Last month, investment researchers said the Financial Conduct Authority’s review into closet tracker funds was long overdue, calling the industry “riddled” with unfair fees for index-linked products.
Mr Robertson said it is difficult for private investors to weed out the closet trackers when selecting funds and therefore many just “don’t bother”. He also pointed out cost is not the only factor driving passive investing, suggesting time was also an element.
“Many investors do not feel they have the expertise or time to spend poring over fund manager performance and capability. Therefore, a low-cost investing solution which tracks a market or index makes sense to them.”
“However, on charges at it is important to compare the whole passive sector with the whole active sector as there are many passive funds with charges virtually the same as active,” he added.
When its comes to passive funds, unsurprisingly the higher charges tend to bring a lower return.
Adviser view:
Darius McDermott, managing director of Chelsea Financial Services, said investors have the choice between top quality performance, or a fund which is cheap.
“I’m not anti-passive, I’m just pro-active,” he said, arguing people who use passive funds just because they are cheap are “missing out on a sub-sector of funds that are worth paying for”.
Fact
Of 56 UK equity tracker funds taken from the FE passive ratings service, those charging under 0.75 per cent delivered 11.75 per cent on average over three years, against a 8.1 per cent return for passive funds charging 0.75 per cent or more.
katherine.denham@ft.com
