Funds take half your growth in fees
by Kathryn Cooper, Sunday Times
October 10, 2004

INVESTORS in Britain’s most popular funds have lost up to half their growth in charges over the past 10 years.

A survey of 20 of the country’s best-known UK growth funds, in which savers have invested a total of £9 billion, reveals that only three have managed to beat the market over the past decade because of the impact of high fees.

Penniston-Hill of Intelligent Money, which conducted the survery, said: “A staggering 85% of the most popular funds — and 80% of all UK schemes — have lagged the index over the past decade because of the devastating impact of fees and dire performance.”

One of the worst is Gartmore UK Growth, which has taken 45% of your growth in charges over 10 years. The fund was sold heavily in branches of NatWest, which owned Gartmore.

If you had invested £10,000 in the Gartmore UK Growth fund 10 years ago, you would now have £18,323 before charges. But the fund manager levies an initial fee of 5% and an annual charge of 1.5%, making a total of £3,736 over a decade. Investors are left with only £14,587 after costs, a return of 46% compared with a gain of 56% in the FTSE All-Share.

The Gartmore scheme is closely followed by Prudential UK Growth, which is among the biggest funds in the country with assets of nearly £600m. It has taken 43% of investors’ growth in fees over the past decade. An investment of £10,000 would now be worth £14,418 after charges — a return of only 45%.

Investors would have been better off with a low-cost tracker. Legal & General’s UK Index fund, for example, has no upfront fee and an annual charge of 0.5%. If you had invested £10,000 a decade ago, you would now have £19,152 after charges.

Active funds typically pay commission to advisers of 3% upfront and 0.5% a year; trackers do not normally pay any commission.

The survey also uncovered funds that could take nearly half of your growth in future.

For example, if you invest £10,000 in Jupiter UK Growth & Income and it grows by 7% a year over 10 years, you will have £19,671 before charges. However, Jupiter will levy fees of £4,480 — or 47% of your growth. New Star UK Special Situations will take £4,410.

Many of the schemes in the survey claim to be active funds but are in fact “closet trackers” with scant chance of beating the market, even before their fees.

Aberdeen UK Growth, for example, has deviated from the FTSE All-Share by an average of just 4.5% over the past decade, against 10% for active funds in general. The fund has nevertheless taken 37% of growth in charges.

Fund managers have largely ignored pressure to cut their fees. In fact, annual charges are rising. Framlington, Investec and Legal & General have all announced annual fee increases in recent months. Framlington, for example, hiked the charges on five funds from 1.25% to 1.5% in March.

The true cost of investing is usually even higher than the stated annual fee because managers can exclude some legal and administration costs from their explicit charges.

The total expense ratio (TER) gives a more accurate picture. Last year, the average TER rose from 1.59% to 1.64%, according to Fitzrovia, a data firm.

Earlier this year, the Financial Services Authority (FSA), the City watchdog, relaxed its rules to allow unit trusts to charge performance fees.

Justin Modray of Bestinvest, an adviser, said: “We would welcome performance fees because they align the interests of the manager with the client’s. However, none of the big firms has risen to the challenge because of a lack of support from advisers.

“If annual fees were related to performance, commission for advisers would also be variable. However, we support the idea because we’re confident of picking the best funds for clients.”

Modray recommends that investors in “dog” funds such as Gartmore, Prudential and Aberdeen UK Growth switch to Cazenove UK Growth & Income or Liontrust First Growth.