PA ANALYSIS: Time to put an end to rip-off passive funds

Active managers are under pressure like never before to either justify or cut their fees, but have passive funds been getting an easier ride than they deserve as a consequence?

PA ANALYSIS: Time to put an end to rip-off passive funds


Passive fees have been squeezed over the past couple of years making them even lower relative to active fees in many cases, but there are still plenty of rip-offs out there. 

While the headline grabbing, acceptably low price of 6 basis points (bps) for portfolio staples such as FTSE 100 and S&P 500 trackers may tell one part of the story, they are far from representative of passives overall.

Square Mile Investment Consulting and Research has produced research suggesting investors are paying in excess of 16 times what they need to for passive investment in some instances.

The fund research house said investors can pay as much as 143bps for a passive fund, which is far in excess of many active fund fees. It also said it found that 12% of passive assets in the UK All Companies sector are invested in just five funds, all of which have ongoing charges of 100bps or higher.

They are; Scottish Widows UK Tracker, Virgin UK Index Tracking, Halifax UK FTSE All Share Index Tracker, Halifax UK FTSE 100 Index Tracking, L&G (A&L) Capital Growth, (only available to Alliance and Leicester clients.)

While these appear to be among the worst offenders, there are plenty more culprits out there. The fact that these funds exist points to a continued lack of basic financial education among the wider public, because nobody who has any understanding of investment products would be prepared to pay 100bps or more for a FTSE tracker when you can get one for 6bps elsewhere.

Many people will have invested in these without receiving any advice, but any financial advisers that have steered clients towards paying 100bps for a basic tracker should be doing something else for a living. It should also be incumbent on product providers not to take advantage of investors in this way.

It is totally unacceptable for a passive fund to charge fees comparable with a truly active fund. So-called ‘closet trackers’ which look very much like indices should not be included in this of course, only genuinely well managed active funds with a significant active share.

Following the initial design, set-up and marketing of a passive fund the ongoing costs and investment of time for a provider to run it are a fraction of active funds. This is principally because it does not involve paying teams of fund managers and analysts to dedicate their working lives to running them. To what degree managers should be compensated for their time and effort is a heavily debated issue, but the reality that active funds incur a much greater ongoing running cost is clear.