The expensive investment funds you need to sell – and what you should buy instead
Investors are unnecessarily paying millions of pounds extra a year for tracker funds charging fees 15 times higher than the average.
Trusted household names such as Halifax and Legal & General are leaving investors' money to languish in “inexcusable” expensive tracker funds when there are far cheaper options available.
On average investors should expect to pay 0.1pc a year for a tracker fund – which mimics the performance of an index like the FTSE 100. But analysis carried out for The Telegraph by investment research company Morningstar has revealed that some tracker funds are charging between 0.5pc and 1.5pc a year.
This makes them more expensive than the average actively managed fund, even though investors in trackers will not benefit from a stockpicker’s expertise.
The worst offenders are the Legal & General Tracker CTF, which tracks the FTSE All-Share index, and the Family Charities Ethical Trust, offered by OneFamily, which tracks the FTSE4Good UK 50 share index. Both quote an ongoing charges figure of 1.5pc. Over a decade, an investor with £15,000 in either of these trackers would lose £2,250 to fees compared to £150 for an investor paying 0.1pc.
The research shows that investors are still plagued by so-called “legacy” share classes despite the City watchdog pushing for asset managers to make investing more cost-effective for consumers.
Halifax’s FTSE All-Share and FTSE 100 trackers in the C and D share classes are no longer open to new investors, but they still carry a steep 1pc fee. Meanwhile, L&G still charges investors in its R classes between 0.6pc to 0.7pc for funds also available at charges as low as 0.19pc through the I class.
As of 2020 the Financial Conduct Authority requires asset managers to carry out assessments into its funds every year. They must move investors into cheaper share classes if they decide that older share classes are not good value for money.
However, managers will leave investors in the expensive share class if it decides the fee if justified. Halifax for example said its 1pc funds were offered to Isa investors by Halifax financial advisers in the 2000s and the cost of that advice has been recovered each year.
But Ian Millward, of Candid Financial Advice, a financial adviser, said it was inexcusable that investors with these funds are still paying the fees of financial advisers they used almost two decades ago.
“Halifax withdrew this [fund] 13 years ago but have happily left loyal customers paying this excessive cost, which they will have long since recovered. It’s really shabby behaviour.”
The £2bn Virgin UK Index Tracking Trust launched in 1995 and, after years of criticism, finally cut its 1pc a year charge in 2019 but it is still one of the most expensive tracker funds available, charging 0.6pc and costing investors £12m a year in fees.
Halifax, Virgin Money and L&G all said that their funds offer good value because the fees are bundled – which means the platform fee that would normally be charged by a stockbroker is included in the overall cost. A spokesman for Virgin said: “In comparison, many other companies will advertise what appears to be a low charge but quote platform and admin fees separately – bumping up the total cost.”
OneFamily said its fees were transparent and “reflect the cost of running accounts that are accessible to everyone”
But these funds are still expensive compared to what else is out there on the market.
For example, the investment firm AJ Bell charges a platform fee of 0.25pc. If an investor bought the iShares 100 UK Equity Index Fund – the cheapest tracker fund following the UK stock market, with an OCF of 0.06pc – they would still be paying half the charge of the Virgin tracker.
If investors suspect they are overpaying for a tracker, they should consider changing their investment. James Norton of Vanguard, the American fund giant that pioneered the tracker fund in the 1970s, said over time charges are the biggest drag on investment performance.
“An investor 30 years away from retirement with a £10,000 pot paying 0.3pc in total costs would have a pot of £41,529 on retirement, assuming 5pc growth a year. Had they paid 1.2pc in total costs, however, they would have a pot of just £31,777 in the same time frame.”
Other popular cheap tracker funds include Fidelity Index World, which tracks the MSCI World index and charges 0.12pc, or some of L&G’s cheaper I class trackers, like L&G Global Emerging Markets Index which charges 0.25pc.
But tracker funds have their limitations. Holly Mackay of consumer money site Boring Money said, “By definition you buy the average. You get everything whether it’s good, bad or ugly.”
In a falling market this indiscretion can be a problem. “Tracker funds are immune to global news and trends and plough on regardless. Whereas so-called ‘active funds’ can choose to dump airline stocks, or add to energy stocks, tweaking and reacting to events,” said Ms Mackay.
It is generally recommended to have both trackers and active funds in your portfolio. Liontrust Special Situations, which has returned 29pc to investors over the last five years, could be a good option for those looking for exposure to British stocks, while Terry Smith's Fundsmith Equity, despite suffering a terrible 2022, has returned 73pc in the same period.
Both are relatively expensive, with charges of 0.81pc and 0.95pc respectively. But they are still cheaper than some of the tracker funds available – and tracker funds will give you no hope of beating the index.