Costly trackers enjoy last hurrah before FCA value for money changes

Virgin charges investors 1% for a tracker fund that fell more than 10% in 2018

Asset managers and banks reaping returns off costly trackers may have enjoyed their last hurrah in 2018 as the Financial Conduct Authority’s ‘value for money’ changes come into play this September placing pressure on passive funds with high ongoing charges.

Portfolio Adviser analysis found the worst-performing FTSE All Share trackers of last year all had an OCF of at least 1%, while a number of passive funds charge investors more than 0.50% – a level the regulator has already implied is too high.

However, those fees are expected to come down in 2019 as non-executive directors are required to conduct an annual assessment of value for money, which will be published in fund prospectuses, from 30 September, as outlined in the final rules and guidance from the FCA asset management market study published in April 2018.

FTSE tracker performance in 2018

Among FTSE All Share trackers, the £2.7bn Virgin UK Index Tracker, which has an ongoing charge of 1%, was the worst performer in 2018 losing investors 10.17%. The £77.2m Janus Henderson Inst UK Equity Tracker Trust and £1.7bn Halifax UK FTSE All Share Index Tracker were the only other FTSE All Share trackers with OCFs of at least 1% and were the second and third worst performers respectively, losing investors 9.95% and 9.88% over the year.

The L&G UK Index Trust – with an OCF of just 0.10% – was the top performer.

FTSE All Share trackers – performance in 2018

Tracker fundPerformanceAUMOCF
L&G UK Index Trust I Acc-8.93£5,619.0m0.10%
M&G Index Tracker A Acc GBP-8.95£505.6m0.51%
PUTM UK All Share Index-9.02£16.9m0.13%
Xtrackers FTSE All-Share UCITS ETF 1D GBP TR-9.03£61.5mN/A
iShares UK Equity Index (UK) D Acc-9.04£8,595.6m0.06%
Scottish Widows UK All Share Tracker I Acc-9.06£5,448.4m0.36%
Blackrock ACS UK Equity Tracker X1 Acc-9.07£5,778.9m0.01%
Blackrock ChariTrak Common Investment Inc TR-9.09£280.8mN/A
CAF UK Equitrack I Acc-9.15£357.4m0.18%
Fidelity Index UK P-9.20£2,221.9m0.06%
HSBC FTSE All Share Index C Inc TR-9.20£1,424.2m0.06%
Quilter Investors UK Equity Index U2 Acc GBP-9.23£211.9m0.30%
Aberdeen UK All Share Tracker L Acc GBP-9.27£1,439.2m0.22%
CMI UK Equity Index Tracking DC1 TR-9.33£2.4mN/A
BMO FTSE All-Share Tracker 1 Inc TR-9.55£359.9m0.52
SSGA UK Equity Tracker-9.60£5,784.8m0.15%
Vanguard FTSE UK All Share Index A Acc GBP-9.65£7,433.0m0.08%
Royal London UK All Share Tracker Z Acc-9.68£519.8m0.14%
SSGA SPDR FTSE UK All Share UCITS ETF-9.72£469.0m0.2
Janus Henderson UK Index A Inc TR-9.72£208.6m0.70%
Aviva Inv UK Index Tracking 1 TR-9.77£772.6m0.48%
Halifax UK FTSE All Share Index Tracker C-9.88£1,749.901.03%
Janus Henderson Inst UK Equity Tracker Trust TR-9.95£77.2m1.04%
Virgin UK Index Tracking TR-10.17£2,676.8m1.00%
Source: FE Analytics

Fundscape chief executive Bella Caridade-Ferreira describes the Virgin UK Index Tracker as a passive fund with active charges. “It’s absolutely outrageous and these providers should be ashamed of themselves. There is no earthly reason for such high charges apart from making money off poor, unsuspecting customers.”

A Virgin Money spokesperson says its joint venture with Aberdeen Standard Investments, announced in March 2018, represents “a significant opportunity to transform our retail investment offering” when asked by Portfolio Adviser whether it had any plans to reduce the OCF on its tracker fund. He says exact timing for the joint venture to complete has not yet been confirmed.

Regarding the effect of the FCA value for money assessments on costly passive products, Caridade-Ferreira says: “They should drop their charges – emphasis on the should. It would be difficult for them to justify the charge so I’m not sure how they can get round it.”

Alpha AMC head of regulation Andrew Glessing agrees the value assessment for funds is due to see costs come down. “There’s a general expectation from the industry, whether its passive or active funds, that the FCA’s intervention will certainly put some pressure on costs or certainly create the need to justify them.”

What OCF is value for money?

Lang Cat director Mike Barrett says while value for money is subjective, it would be difficult for non-executive directors to argue the Virgin tracker is good value when identical products from the likes of iShares or Vanguard charge a fraction of the price. Not only would they be putting their reputation on the line but they are also liable under the senior managers’ regime, Barrett says.

While he says the FCA has not explicitly stated what OCF would be suitable for a passive, it implied in the interim asset management market study that 0.5% was too expensive.

The November 2016 report stated: “We have found that around £6bn is invested in passive equity funds with an OCF equal to or above 0.5% for clean share classes or equal to or above 1.0% for bundled share classes. We consider that investors in these products are likely to benefit from switching to better quality, lower priced passive funds in the same investment category.”

In the FE-Rated Passive Investments universe, 36 out of 321 products had a share class with an OCF higher than 0.5%, according to FE Analytics.

The Santander Stockmarket 100 Tracker Growth Unit Trust offers the most expensive share class charging an institutional client 1.5% for a Child Trust Fund product, although a share class is available to UK retail investors with an OCF of 0.35%. Some investors in the BNY Mellon S&P 500 Index face an OCF of 1.15%, but a C share class charging 0.45% is available.

Costliest FE-Rated Passive Investments

Tracker fundAUMOCF
Santander Stockmarket 100 Tracker Growth Unit Trust IA in GB£394.5m1.50
BNY Mellon S&P 500 Index Tracker A USD in GB£56.4m1.15
Halifax UK FTSE 100 Index Tracking C in GB£1,153.0m1.06
Janus Henderson Inst UK Equity Tracker Trust TR in GB£77.2m1.04
Halifax UK FTSE All Share Index Tracker C in GB£1,749.9m1.03
Source: FE Analytics

Competitive advantage for passives other than cost

Fees competition means passive funds with exorbitant OCFs are in the minority, says Morningstar associate director for passive strategies, Europe, Jose Garcia Zarate. He is not surprised products like the Virgin UK and Halifax UK FTSE All Share index trackers are among the most expensive, stating high street banks have a captive client base.

But where fees are coming down, passive products are now competing on factors other than price, he says.

“We’re getting to a situation where price competition has been so intense, particularly in some areas of the market, that the price difference between one fund and the other is basically in the realm of one or two basis points,” Garcia says. “When prices are so low then you look at other factors as part of your selection process. Those factors could be reputation of the house, whether the fund engages in securities lending, tracking efficiency and tracking error.”

Willis Owen head of personal investing Adrian Lowcock points out the M&G Index Tracker appeared to have had better tracking error than the L&G UK Index Trust in 2018 but missed out on the top spot for performance due to higher costs. It charges investors 0.51%.

M&G Investments did not respond to request for comment from Portfolio Adviser regarding whether it would be reducing fees in light of the FCA value for money changes.

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