An expert has flagged an issue (Image: Olga Pankova via Getty Images)
Many investors are paying premium fees without getting premium returns, a financial adviser has warned, as they are paying chunky fees that simply cannot be justified. Most people invest in shares in two ways, either through actively managed funds, where a human fund manager decides which companies to invest in, or via tracker funds that simply mirror (or ‘track’) the performance of a particular index, such as the FTSE 100, FTSE All-Share or S&P 500.
While many tracker funds come with annual fees as low as 0.05% to 0.2%, as there is no time-intensive stockpicking to be factored in, many active funds will charge fees of 0.5% to 1%, which is significantly higher — and can really impact returns. Martin Rayner, financial adviser at Compton Financial Services, a financial planning firm, said that higher fees could be justified if the returns were far stronger on active funds than trackers — but the hard data shows they are not.
Martin said: “The data on how active funds perform relative to trackers is astonishing and is something more regular investors need to be aware of. For example, I often draw people’s attention to research from Standard & Poor’s Indices Versus Active (SPIVA), which shows that, in Europe, 97% of active funds have underperformed the S&P Europe 350 index over a 10-year period.
“So many investors are paying higher fees for active funds despite the evidence showing that a large majority underperform comparable tracker funds over the long term. In short, many people are paying through the nose for underperformance.”
Martin said that, for the vast majority of investors who were focused on long-term growth through their pensions and ISAs, the priority was consistent returns with sensible costs.
Martin Rayner (Image: Martin Rayner/Newspage)
He continued: “Most people want to know their money is steadily growing and that the returns are not being eroded by sky-high fees. If that is what you are looking for, which many investors are, there is a strong case for tracker funds forming the core of a portfolio.”
Martin added that there would, of course, be a number of active funds that beat the returns on trackers, and that actively managed funds could still figure in a diversified portfolio.
He said: “This is not about ruling active funds out altogether, but rather using them strategically in a portfolio, for example to give you exposure to a specialist sector or emerging market. But for many investors, having low-cost tracker funds doing the heavy lifting in their portfolio will often be the starting point.”
Martin said that, ultimately, each person’s appetite for risk and financial goals would be pivotal to how and where they invested.
He added: “It goes without saying that each person’s risk profile and circumstances are different so every portfolio needs to be constructed on a bespoke basis. What works for one person will not work for another.
“But it is important that people investing heavily in active funds are aware of what the data shows — namely that a large majority have historically underperformed comparable tracker funds over the long term, despite charging higher fees.”