Aggressive charging strategies are increasing in numbers

This article is part of
Passive Investing - June 2014

Fidelity, the latest entrant to take on the more established index giants, recently announced new, clean share classes on its seven-strong range of tracker funds, available through FundsNetwork as cheaply as an ongoing charge of 7 basis points (bps). Non-Fidelity platforms will carry the funds at a blanket premium of 2bps higher.

While the group’s head of retail John Clougherty stresses at no point have they used the contentious term, he did want to issue a “statement of intent” to the market with “a really aggressive play”.

With market appetite for indexed funds showing no signs of abating, you can’t blame him.

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David Norman, co-founder of TCF Investment, makes the following point: “I don’t think Fidelity does things in a light-hearted way.

“It is interesting that one of the world’s biggest active managers is now getting involved in the passive space, so that would seem to indicate that it is not a fad.”

Mr Clougherty adds: “Having priced our [previous range of funds] at or around market leading price, we continued to review and gain feedback from brokers and end customers, leading to the decision that we wanted to make a really bold move.

“This was Fidelity thinking what we did would be good for the market and good for us in terms of becoming a major player in what we see as a long-term structural growth area of the market.”

Vanguard has a slightly different take. Nick Blake, head of retail, says the group has brought down its global average ongoing charge from 91bps in 1975 to just 12bps today.

“That is an 86 per cent reduction and we will be relentless in continuing to do that,” he adds, suggesting that perhaps one of the reasons for the emotive language, which he calls “unfortunate”, is the velocity with which price cuts are happening.

He says in the US, the direction of travel is definitely still downward, but it is far more gradual.

Data provided by FE Analytics shows a reduction in the average annual management charge (AMC) of a significant majority of tracker funds available to the UK retail market has come down from 61bps in 2009 to 46bps today.

But the AMC is losing relevance as fund literature is now required to carry the ongoing charge allowing for more accurate comparisons with better disclosure – a move supported by both Vanguard and Fidelity as well as Investment Adviser.

If competitive forces are driving down costs that can only be a good thing for investors, but how low can they really go?

Mr Blake says Vanguard’s corporate structure as a mutual puts it in a fortunate position, being run as an “at cost” business allows them to continue to reduce charges as scale improves efficiencies, rather than worrying about margin in order to deliver shareholder returns.

“When it comes to pricing, our strategy is a long-term, at-cost pricing strategy, not a marketing strategy.”

He says: “If people want to try and undercut us they’d better be prepared to keep doing it, because cost reduction is what we do.”