Fund charges exposed as fees outstrip returns

Fund charges exposed as fees outstrip returns

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.

It has been a tough decade for investors, with two sustained periods of falling share prices. During periods of volatility and lower investment returns, it pays to keep an eye on costs, which can obliterate slim returns.

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.

All funds should state what sector they are in and how they "benchmark" returns. So a fund invested in the US market might be benchmarked against the Dow Jones index, and should be compared against US fund managers.

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

Mistakes to Avoid - Swinging for the Fences

Swinging for the Fences

Loading up your portfolio with risky, all-or-nothing stocks, is a sure route to investment disaster. In other words, swing for the fences on every pitch.

For one thing, the insidious math of investing means that making up large losses is a very difficult proposition - a stock that drops 50% needs to double just to break even.

For another, finding the next Microsoft when it's still a tiny start-up is really, really difficult. You're much more likely to wind up with a company that fizzles than a truly world-changing company, because it's extremely difficult to discern which is which when the firm is just starting out.

In fact, small growth stocks are the worst-returning equity category over the long haul. Why?

First, the numbers: According to Professor Kenneth French at Dartmouth, small growth stocks have posted an average annual return of 9.3% since 1927, which is a good deal lower than the 10.7% return of the S&P 500 over the same time period. The 1.4% difference between the two returns, has an absolutely enormous effect on long-run asset returns - over 30 years, a 9.3% return on $1,000 would yield about $14,000, but a 10.7% return would yield more than $21,000.

Moreover, many smaller firms never do anything but muddle along as small firms - assuming they don't go belly up, which many do. For example, between 1997 and 2002, 8% of the firms on the Nasdaq were delisted each year. That's about 2,200 firms whose shareholders likely suffered huge losses before the stocks were kicked off the Nasdaq.

Also read:
Compounded Effects of Market Underperformance

Compounded Effects of Market Underperformance

Compounded Effects of Market Underperformance

Beating the market with even slightly higher rates of return is a shorter path to wealth. This is especially true if the investments are left on the table to perform, and perform consistently, over time.

What about investments achieving less than market average return?

What happens when you cling to these investments?

Are they like a bad marriage, not only producing inferior returns but also consuming valuable time that you could put to work elsewhere?

From an investment perspective, yes.

Click to view:
http://spreadsheets.google.com/pub?key=r59JmWu8jkHxD7HKgWcvKUA

The table illustrates that it isn't hard to show what happens when you hang on to the losers, or even the inferior "winners."

Compared to market returns of 10%, an investor underperforming the market by 2% (or achieving an 8% return) falls 7% behind a market performer after 10 years, 31% behind over 20 years, and 42% behind over 30 years. An investor underperforming by 6%, loses 43 %, 67%, and 81% to the market performing investor over 10, 20, and 30 years respectively.

That's quite a price to pay for underperformance.

Now, if your investments are producing negative returns, the results can be quite ugly indeed.

LESSON in these numbers: Don't hang on to chronic losers! Not only do you lose, but you also lose out on opportunities to gain. If it's broke, fix it!