John Plender

Investors pay active managers £1.80 to get the equivalent of investing £1 directly in the market, according to new report. The report from the Centre for the Study of Financial Innovation said investors pay £20bn a year in charges to active managers. This is akin to "being hit with a charge roughly equivalent to a pensions scandal every six months," according to former FSA official Kevin James, author of Waiting for Ariadne: A Suggestion for Reforming Financial Services Regulation.

The report bolsters Ron Sandler's argument against actively managed funds. Mr James said: "Luring investors into the labyrinth is more expensive than one might think." He said the call of past performance was a powerful siren for the average investor. Mr James added that despite wealth warnings, investors largely pick funds on the basis of past performance. He said: "People who are already in a fund stay put, barring disastrous underperformance". They give explicit charges "little thought", he added.

A well-run tracker fund, says the report, will provide investors with security and will lower the costs of management, which is the rationale behind Mr James' proposition for his proposals for fund structure reform. His fund will only trade about 25 per cent of the portfolio to lower costs and decrease risk.

However, Clare Arber, head of communications at the IMA, said:

"There is a place for both active and passive funds in a portfolio. It is about what suits an individual's personal circumstances... Trackers will suit some investors, but anyone looking for income won't be best served by a tracker fund, despite its lower charges."