Reforms to the fund management industry mean that from April, distributors of funds such as online supermarkets must offer “clean share classes” with no commission included and make their charges explicit.Figures from Trustnet Direct show that there are 15 funds in the IMA UK Equity Income sector that charge 0.8 per cent or less [80 basis points], including funds with very different styles and focuses.
Investors will have to pay platform charges on top of that, however, with some as low as 0.25 per cent.
The clean share class includes the annual management charge [AMC] which the fund management company receives as payment, and administration costs which can vary. These involve various legal and administrative fees that are passed on to the customer.
Not all investors understand the changes that have been made.
John Blowers (pictured), head of Trustnet Direct, said: “There is much confusion at present, with platforms moving their pricing to reflect the regulatory changes to outlaw commission.”
“And it is good news for the investor, as fund charges have fallen pretty significantly across the board.”
“Commission has been scrapped, which has pretty much halved the core annual cost of owning a fund and hopefully a clear and explicit fee levied by your platform provider.”
With fees on funds slashed across the board, it is a good time to look at what the cheapest funds on offer are.
The cheapest fund available to retail investors in the IMA UK Equity Income sector is the Montanaro Equity Income fund.
This is something of an exception, however: the £74m fund is currently charging no AMC until it reaches £100m in size.
This means you can currently buy the fund for just 0.22 per cent administration expenses and the platform fee of your chosen provider.
On Trustnet Direct, platform fees are just 0.25 per cent.
Montanaro UK Equity Income has only been listed in the IMA sector since last month, but its track record would make it one of the top-performing funds of the last five years, with returns of 199.78 per cent to the 121.75 per cent of the sector.
When the fund hits £100m it will charge an AMC of 0.75 per cent, for a total ongoing charges figure of 0.97 per cent.
Performance of fund vs sector over 5yrs
Source: FE Analytics
After this, the Vanguard FTSE UK Equity Income Index tracker fund is the next cheapest option.
Ongoing charges are just 0.25 per cent, meaning that on the cheapest platforms the end investor will pay just 0.5 per cent overall.
The fund is currently yielding 4.03 per cent, around the sector average, and it has five FE Crowns.
It tracks the FTSE UK Equity Income index, directly holding all 136 portfolios on that benchmark.
Over the past three years it has performed roughly in line with the sector average, although over one year the fund has fallen into the fourth quartile.
This is down to many funds in the sector overweighting the small and mid cap sectors that have done so well, an option that a passive tracker fund doesn’t have.
The two cheapest active funds, aside from the Montanaro portfolio, are Threadneedle UK Equity Income and Royal London UK Equity Income, managed by Martin Cholwill.
The fund has a strong mid cap focus, which has helped it to produce top-quartile returns over three, five and 10 years.
The fund has made 66.28 per cent over the past three years while the average fund has made 44.15 per cent.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
Threadneedle UK Equity Income has the same low charges of 0.63 per cent, although currently yields are marginally less at 3.4 per cent than the Royal London fund’s 3.48 per cent.
Co-manager Richard Colwell recently told FE Trustnet which stocks he and FE Alpha Manager Leigh Harrison currently favour.
Source: Trustnet Direct
The Royal London fund and Rathbone Income are the two funds on the list with the best track records in terms of total return.
Both are top quartile over three and five years.
Lazard UK Income and Montanaro Equity Income are both top quartile over five years but second quartile over three.
Investors are often told that cheaper funds will make them more money in the longer run thanks to the compounding effect of extra fees.
This is assuming that better performance on the more expensive funds doesn’t outweigh this effect.
Our data doesn’t show any obvious correlation between cheaper funds and outperformance, however, historical data reflects the performance of the older “dirtier” share classes in many cases.
The clean share classes have in most cases been tacked onto the previous retail share classes – the dirty share classes – to provide investors with an accurate picture of what they would have made if they had been invested in the funds.
This means that past performance in most cases reflects the performance of an earlier share class.
