More than £100 billion is invested in funds where the fees charged have outstripped investment returns over the past 10 years.
Published: 6:51AM GMT 02 Feb 2010
Millions of investors have their pensions and long-term savings in funds where the managers have taken more in fees than they have delivered in returns over the past decade.
New research – seen exclusively by The Daily Telegraph – has looked at the performance of the biggest pensions, insurance and investments funds in Britain – and it makes sobering reading.
More than £100 billion is invested in funds where the fees charged have outstripped investment returns over the past 10 years. In total, the managers of these funds have received almost £10 billion in fees.
Many of these funds are run by some of our best-known banks and insurers. Matthew Morris, a former financial adviser who conducted this research, said: "Special mention should be made of Scottish Equitable, NatWest, Scottish Widows, Scottish Life and Phoenix, all of whom have too many funds that meet these depressing standards."
NatWest (part of the RBS group) and Scottish Widows (now owned by Lloyds Banking Group) are now both partly owned by the Government.
The Daily Telegraph contacted all the above providers and only Scottish Equitable and Phoenix replied.
A spokeswoman for Scottish Equitable said: "We take fund performance very seriously. We've made changes to personnel and investment strategy to address areas of underperformance. Figures are improving, but in some cases not as quickly as we'd like."
A spokesman for Phoenix said: "Many of these policies have guarantees, the value of which exceeds the asset share. And in this case the investment return earned, whether good or bad, may not impact the payment a policyholder receives."
Mr Morris conducted the research for the financial website he runs – www.howmuchdoineedtoretire.co.uk – which offers consumers information about their retirement options.
He says: "There is a staggering amount of money invested in these underperforming funds, where the manager hasn't even been able to deliver sufficient returns to cover his own fee.
"We decided to create a list of those funds, which have a significant size (more than £100 million) and the returns averaged at less than 1 per cent a year."
A total of 260 funds met these criteria. To put this in context, over the same 10-year period
- the FTSE100 returned 9.8 per cent (including dividend payments),
- the FTSE All-Share was up by 18.6 per cent and
- the average investment fund delivered a return 41.5 per cent.
But Mr Morris has also identified 45 funds within this group that "stood out from the crowd" because of their disappointing performance and their size – a number of which are listed in the table above.
These funds, he says, have failed their investors "on every count we can measure".
There is, of course, a cost to investing, be it
- an upfront fee charged on a pension or unit trust,
- annual management charges deducted, or
- the charges levied when a manager buys and sells investments within a fund.
- There are also tax charges to be taken into consideration, some of which are automatically deducted within a fund, others that are only paid when you cash in an investment.
There are a number of steps investors can take to reduce the cost of investing. Those buying an investment fund, such as a unit trust or Isa, should look to use a discount broker, where any commission charges are usually refunded in full.
Many fund managers will automatically deduct up to 5 per cent upfront as an "initial charge", which can take more than a year to recover in poor markets.
Annual management fees are often far lower on "passive" investments such as tracker funds, or exchange traded funds (ETFs), where the return is linked to the performance of a given stock market index (for example, the FTSE100) rather than paying a fund manager to manage a portfolio of selected stocks.
Many tracker funds now charge less than 1 per cent a year, and some ETF have expense ratios as low as 0.35 per cent. However, it is still normal for actively managed funds to charge 1.5 per cent a year.
Mr Morris adds: "There are occasions where a fund manager can justify taking a higher fee than they return. In the short term, this may frequently happen as investment values go down, but regular fees will still be deducted."
In some cases, this can happen over longer periods, too. Anyone who invested in a Japanese fund in the Nineties could not have avoided the extreme fall in share prices seen over this decade. But over 10-year periods such examples are few and far between.
For every fund where there is a genuine reason for a period of sustained underperformance, there will be many more where there is no justification for such poor returns.
As well as keeping an eye on costs, investors should regularly review the performance of all their savings and investments. This does not only mean looking at whether you have made money or not, but also checking how the fund managers rate in relation to their peers.
If this market goes into decline, you would expect the fund to lose money, but the pertinent question to ask is whether your manager has lost less than others in this sector. If a manager seriously underperforms for an extended period – say three years – investors should consider moving their money elsewhere.
Those funds listed above have all underperformed over extended periods. The Scottish Equitable European Pension fund has lost almost 1 per cent in value over 10 years, compared to an average growth of 2.7 per cent in this sector.
It also has the unenviable record of being ranked bottom out of the 73 funds in its sectors over five years; and coming 43rd out of 43 funds over the decade.
Mr Morris says he would like the fund managers either to improve returns, reduce charges or start offering refunds. This seems unlikely, though, in the current climate.
But while billions remain languishing in these funds, it is not hard to see why managers continue to take their large fees. Investors need to start switching from fund managers who don't offer a commensurate return on their investment.
If enough people took action, these managers may not collect such generous bonuses, and you may start to see a decent return on your money.
A full list of funds that have underperformed can be found at www.howmuchdoineedtoretire.co.uk/thefundslist.html
http://www.telegraph.co.uk/finance/personalfinance/7134695/Fund-charges-exposed-as-fees-outstrip-returns.html
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