Advisers have called for a shake-up of UK equity tracker funds as some of the products have been accused of existing simply for “siphoning fees out of investors”.
Passive funds, which track the performance of an index, have experienced a surge of inflows in recent years. Investment Association data shows the proportion of money in such funds has risen from 6.3 per cent at the end of 2009 to 12.1 per cent at the end of May this year.
But FinalytiQ principal Abraham Okusanya said in a report the UK equity tracker fund sector was in dire need of an overhaul because many funds were either sub-scale or too expensive.
He said some of the funds “have no real purpose” beyond being a means for active fund houses to cynically cash in on the passive trend, while others were not using their scale in order to reduce fees to deliver better outcomes for their investors.
There are a large number of open-ended passive funds tracking UK equity indices, with 23 tracking just the FTSE All-Share index.
However, Mr Okusanya said in his view some of those were “sub-advised funds from active fund houses – which tend to do indexing very badly – and they have no complimentary product range”.
He claimed the Henderson UK Index fund, which is run by passive specialist State Street, and the BlackRock-managed Old Mutual UK Index fund were examples.
Given that in both of these instances BlackRock and State Street had their own UK index tracker available for as much as half the price of the sub-advised version, Mr Okusanya claimed the “active fund houses simply take a fee for distributing the funds under their brand names”.
He added that the funds were simply a way of “siphoning fees out of investors”.
“We think – and sincerely hope – some providers would eventually put up their hands and admit that they can’t make index tracking work,” Mr Okusanya said.
He also highlighted “large bloated funds” that had not used their scale to cut fees for their investors, naming Scottish Widows and Virgin as the “arch offenders in this latter category”.
He said if these two types of “laggard” tracker funds were merged into the larger and cheaper products, it would be good for both providers and customers.
“It helps existing providers get rid of failing business streams that have no future whatsoever,” he said.
“And for the providers taking over the funds, it is probably more cost-effective than going off to acquire new customers. This invariably means lower fees and better products for the investors.”
Addidi Wealth managing director Anna Sofat said: “I have long thought that the fund management industry, especially in the passive space, has been complacent and that investors have had poor value.”
Invest Southwest managing director David Penny said the surge in popularity of tracker funds in recent years had encouraged traditional active fund houses to look to tap into that demand.