Are you paying too much for your investment funds?

Are you paying too much for your investment funds?

It’s nice to start the week with a reminder of why my colleagues and I exist.

So let’s do that.

It starts with a story in the FT that caught my eye this morning. The headline was ‘Asset managers named in list of potential closet trackers’.

It sounds dry, doesn’t it? But it’s an important story if you’re investing your money.

Here’s an extract:

Schroders, Fidelity International, JPMorgan, Henderson and Amundi have been named in a list of 80 investment companies that have potentially sold funds that charge high fees for active management but closely mimic their benchmark.

Better Finance, the influential investor campaign group that compiled the list, replicated an investigation by the European markets watchdog last year, which found that up to a sixth of actively managed equity funds sold on the continent potentially overcharged investors.

The European Securities and Markets Authority refused to name the companies it identified as selling potential closet-trackers, funds that charge a premium for their investment expertise but only narrowly diverge from their benchmark. This prompted Better Finance to expose the asset managers found to have sold index-hugging funds.

This isn’t about whether active or passive investing is the better way to go – a debate that has raged for years and which we won’t be settling today!

No, this is about being charged a higher fee to get something you could have got much more cheaply by buying an index tracker.

Better Finance looked at two metrics to decide whether or not to tag a fund as a potential “closet tracker”.

The first, active share, measures the percentage of a manager’s portfolio that differs from their benchmark index.

The second, tracking error, measures the difference between a portfolio’s returns and those of the benchmark index.

Any fund with active share less than 60% and tracking error less than 4% joined the list.

The reasoning’s intuitive: if you own a lot of the same shares as the index and your return is virtually identical, then what’s the point?

What’s the point of the fund manager? What’s the point of paying their fees?

The charge is that there is no point.

As you’d expect, the fund managers are pushing back.

A Fidelity International spokesman said that while active share and tracking error are useful, investors should consider other factors.

A manager’s record, for example. Their access to research.

“Manager remuneration” was also given as something to consider (presumably this means investors should plump for managers who aren’t earning excessively lavish amounts… unless it’s an impressively brass-necked plea for investors to take pity on managers and keep ponying up the dough to fund their lifestyles).

“We also note that the data used to compile the list is looking at the period from 2009-14,” the Fidelity spokesman says.

“This would include the period immediately after the financial crises and an industry-wide pullback in investor risk appetite. With liquidity a prime concern, small-cap positions were cut back with the effect of reducing active share levels.”


I’m in a good mood, so I’m prepared to concede that some of these factors may have had a bearing.

Likewise another one the chap cited, namely that a lot of their funds that made the list were large-cap funds, where it’s harder to build a portfolio that doesn’t have sizeable overlap with the index.

Still, this gives you plenty of food for thought.

Especially when you consider that the study found 165 of 1,013 funds examined – 16% – were potential closet index trackers.

That’s the story from continental Europe. Here in the UK, the FCA has apparently found more than £100 billion is invested in funds that closely hug their index.

It’s far from a universal problem. And there are managers out there who do a good job, delivering returns that more than cover their fees.

But this suggests the issue of closet trackers is big enough to have in mind the next time you’re looking to invest in a fund – and pay their fees.

I respect your privacy and will never pass on your email address to anyone else.

Could you get something similar for less, say by buying a tracker?

I said at the start this story reminded me why I and my colleagues exist. What on earth do I mean?

I’m about to indulge in some nauseating self-congratulation, so gird yourself for that.

What I mean is that Agora Financial UK specialises in publishing ideas you won’t find elsewhere.

If you’re already subscribed to one of our titles then you’ll know our editors’ portfolios don’t resemble some fund you can buy elsewhere – much less an index.

For us, the idea is king. A good, well-researched idea that a reader can follow if they find it appeals to them.

We put these ideas together and publish them for people like you – private, self-directed investors who want to take a more hands-on approach to managing a portion of their wealth (and thus save on management fees).

We don’t waste time fretting about whether we’re “beating” some benchmark or if we’re in the top X percent of managers.

We simply charge a transparent, up-front subscription… and that’s it. We don’t take a percentage of your assets or your gains – we’re a publishing house so why would we?

Aside from the commissions your broker takes and, of course, tax, that’s it in terms of costs.

You’re running the money yourself. You can pay those fat management fees straight back into your own account – or maybe use them to take your other half for a nice dinner (reminder: it’s Valentine’s Day tomorrow).

I’d stress that this is not an either/or proposition. I’ve met readers who invest in funds and run some money themselves.

It’s also not a case of slavishly following our recommendations – the point of being self-directed is that you’re the boss.

Oh, and it’s not all about making money. Granted, it’s mostly about making money – that’s the aim and it’s what we strive to help you do.

But the rewards of controlling your own investments go beyond the monetary returns and cost savings.

Apart from anything else, it’s a great way to learn about how investing works and demystify a sector that bamboozles much more than it should.

If you’re already reading one of our investment titles then you’ll know what I mean.

But if you’re thinking about whether to manage a slug of your own money, how do you get started?

Well, if you’re looking to just dip a toe, I humbly suggest you take a look at my colleague Sean’s “Penny Tech” Profit Plan.

It focuses on small companies. These tend to be high-risk, high-return plays, so you don’t need to put a big chunk of your capital in to get a good potential return (in fact, you shouldn’t).

As such, it’s great if you’re looking to “dip a toe” and start managing a little bit of your own money for yourself.

Oh, and you’ll be investing in some fascinating ideas – and definitely not the stuff of those “closet trackers”.

Check it out here.