Rip-off tracker funds exposed

Source: FE Analytics

Our TER data is based on the latest data available via the FE database.

While low costs are viewed as one of the biggest advantages of passive funds, some trackers are even pricier than their actively managed equivalents. The £500m BlackRock UK Equity fund, for example, has a TER of just 0.52 per cent.

According to FE Analytics, the average fund across the IMA universe has a TER of 1.57 per cent.

A number of the passive funds featured in the study have also significantly underperformed the index they are tracking.

The four FTSE 100 tracker funds with a long enough track record have all failed to return within 10 per cent of their benchmark over a ten year period.

Performance of funds versus index over 10-yrs


Source: FE Analytics

Moreover, while the FTSE 100 has returned 4.42 per cent over five years, all four have lost money during this time.

Nick Blake, who heads up retail sales at Vanguard, says that keeping fees as low as possible is the key to minimising tracking error.

“The destructive impact of charges on compound returns has become even more important in this low-return environment,” said Blake.

“If a fund has a TER of 0.25 per cent, ten years later 97.53 per cent of the portfolio is retained. However, if the TER is 1 per cent, this figure falls to 90.44 per cent.”

“In my opinion, it’s counterproductive to buy a tracker fund if you’re not paying tracker prices.”

The average Vanguard tracker has a TER of 0.23 per cent. Many of the group’s passive funds are yet to achieve a three year track record, though most have made a very strong start. The Vanguard FTSE UK Equity Index fund, for example, has underperformed its FTSE All Share benchmark by just 0.44 per cent since its launch in June 2009.

Performance of fund versus index since launch


Source: FE Analytics

The £2bn Virgin UK Index Tracking fund is the largest tracker with a TER of 1 per cent or over.

Communications director at Virgin Scott Mowbray says the fund’s greater flexibility justifies the higher fees.

“Our customers tell us they like the simplicity and accessibility of our approach,” said Mowbray. “While most trackers impose minimum monthly payments such as £50 per month which some people cannot afford, the Virgin UK Index Tracker allows investors to put in as little as £1.”

“Smaller investment amounts are costlier to administer, but we've opened up the market to a whole host of people who previously would have been excluded from investing in the stock market.”

“Over a billion pounds in the Virgin UK Index Tracker is accounted for by investors who pay £49 or less per month,” he added.

Mowbray also says that some tracker funds are more expensive than they let on.

“Unlike other funds we do not state a small annual management charge (AMC) and then wrap up a lot of other charges in the other section,” he said. “With our fund it is a very clear 1 per cent AMC with no additional charges.”

It should be noted that the Virgin UK Index Tracking fund has replicated the FTSE All Share more closely than any of its peer group in the short, medium and long-term. Though the fund has marginally outperformed the All Share over one year, Mowbray says the tracker employs a full replication methodology.

“There is always likely to be a small difference between the fund and the index as we are not always able to hold the exact percentages of the minor constituents of the All Share,” he finished.