The fund innovators that aim to cut fees
But ineffective fund managers who take home fat-cat fees regardless of whether they make investors any money are understandably unpopular.
Enter stage left a new type of hybrid fund that aims to offer you the outperformance of the best actively managed funds at the cost of a passive tracker.
Curiously it is the same City stalwarts, who made their millions skimming the cream off the top of investors’ milk, who have seen the light and set up these best-of-both-world products.
Proving to have short memories, the reformed individuals now lambast the industry that made them, for the high fees and volatile performance.
It is this shift in attitude that has led to the managers being deemed gamekeepers turned poachers.
Of course, none of this matters should the new funds deliver the goods. So on the first anniversary of the Vinculum launch, we look into whether the hybrids have delivered on their promises.
The fund where fees depend on returns
The Vinculum Global Equity fund charges a fee of 0.25pc a year, and then takes 20pc of any outperformance over the benchmark index.
Last year an investor who deposited £1,000 would have seen a 12.8pc return and shelled out 1.54pc in fees – lower but not far off the average total expense ratio for unit trusts of 1.7pc.
Manager Nigel Legge – formerly head of Liontrust Asset Management – is not the only manager to buck the high-charging trend, but it is radical to declare “if we don’t deliver, we don’t get paid”.
What if there is global slowdown and all sectors are affected?
“We are relying on long-term data – which is superb,” Mr Legge said. “Global slowdown is a relative thing, it will affect the worst companies way more than the best.”
Top holdings include Apple, energy drinks company Monster Beverage and screw and bolt distributor Fastenal.
“The fee structure is certainly different and refreshing and fees are important in so much as they have a direct impact on investor returns,” said Mick Gilligan of Killik. “However, net investment returns are more important – albeit much less certain. Although the public track record of the process is relatively short, the early signs are encouraging. This fund should appeal to those who want to buy strong companies, who like to only pay for performance and want to get involved in the early stages of a new fund.”
The low-cost ‘buy and hold’ fund
Fundsmith was launched by City veteran Terry Smith in November 2010. He promised something fresh – a fund that would bypass advisers and go direct to investors, cutting costs, and concentrating on picking high-quality shares and holding on to them for the long term, rather than constant trading. This keeps trading costs down, which in turn keeps charges low.
There are no performance fees or initial fees but a flat management charge of 1pc or 1.5pc depending on whether you buy direct from Fundsmith or via a fund supermarket. With other costs included, the cost is 1.16pc and 1.66pc, respectively.
“Fundsmith has outperformed the sector by a good margin since launch, largely by limiting downside compared with the sector – nothing to do with charges,” said Brian Dennehy of FundExpert, which researches funds. “The key for investors is consistent outstanding performance, which is much more important than 0.25pc of charges.”
Wealth manager Philippa Gee rates the fund highly. She said: “You have to be careful that you manage your other investments and get the balance of assets right, as it has a high US allocation, but that is nit-picking. It is a great fund and a worthy contender.” Top holdings include Dominos Pizza, Imperial Tobacco and Intercontinental Hotels. The fund has returned 12.5pc in a year.
The ETF fund run by a manager
Alan Miller, formerly of failed asset manager New Star, launched Spencer Churchill Miller (SCM) in 2009 to give investors a lower-cost option. SCM specialises in portfolios built solely of exchange-traded funds (ETFs), which are funds that are traded on a stock exchange like shares. They are a pooled investment fund, where an individual can gain exposure to a particular index or commodity, providing the investor with the same returns as the underlying market. Mr Miller has had some criticism for championing ETFs, which his rivals say can carry risks.
But Darius McDermott of Chelsea Financial Services said SCM’s products were transparent and well diversified.
“You are getting active asset allocation but using ETFs for underlying exposure. This means they are cheaper than traditional funds of funds,” he said. “They are not ridiculously cheap, though, with total cost on their three funds ranging from 1pc to 1.45pc.”
The SCM Long-Term Return fund, which invests in 70pc global equities and the rest cash and bonds, returned 11.9pc last year.
The funds that charge just 0.7pc
Most of the “Total Clarity” fund range has an annual charge of 0.7pc. The funds are risk graded Defensive, Long Term, Balanced and Cautious and charge no initial, exit, switch or performance fees.
“These managers believe that asset allocation rather than stock selection drives returns over the long term and they emphasise the importance of diversification,” said Mr McDermott. “They use tracker funds to keep costs down but all four funds are consistently underperforming the peer group.”
Mr Dennehy said that the funds were too small to be able to outperform.
“The only unique selling point of TCF that I can spot is that the charges go down as the fund size increases. Taking the TCF Diversified Balanced Portfolio as an example of their prowess, it has barely managed to track the sector average since launch. Perhaps this is reflected in the £2.7m size of the fund,” he said. “TCF has an interesting idea on charges but has totally failed to capture the imagination of investors.”
The Diversified Balanced fund returned 11.2pc last year.
More low-cost options are springing up, as a growing number of “DIY investors” look to make their own decisions. Schroder’s “Core” range mirrors the holdings the company runs for its institutional clients. These funds – one for UK, one for global – both have an annual charge of 0.75pc. Core UK Equity fund returned 6pc last year. Among tracker funds, the cheapest that tracks the FTSE All-Share index, if bought direct, includes HSBC FTSE All-Share, which has a cost of 0.28pc a year, or Fidelity’s Moneybuilder UK, which levies 0.30pc.