While Lowcock (pictured) says charges should never be the only factor determining whether or not an investment is suitable, there are a number of passive funds with low charges that can provide access to much sought-after areas of the market. "Cost is one of a number of factors that investors need to look at when investing in tracker funds and they come in more than one form," Lowcock said.
He adds that costs are more important for short-term investors, who may run up against one-off dealing costs in addition to annual charges.
Here, Lowcock tips five passive funds for investors looking to build a low-cost, diversified passive portfolio.
30% in UK – SWIP Foundation Growth
"This is a FTSE All Share Tracker and is suitable as a core holding in a portfolio, giving exposure to a broad range of UK companies," Lowcock said.
"It is one of the cheapest funds that investors can access."
Since launch in March 2010, SWIP Foundation Growth has made 25.26 per cent, just behind the FTSE All Share’s 28.06 per cent. The IMA UK All Companies sector made 30.61 per cent over the same period.
Performance of fund vs sector and index since launch
Source: FE Analytics
The tracker requires a minimum investment of £1,000 and has an ongoing charges figure (OCF) of 1.12 per cent, according to FE Analytics.
However, this charge falls to as low as 0.1 per cent for anyone investing through a platform.
20% in global – Vanguard FTSE Developed World ex-UK Equity Index
"Vanguard’s developed world equity fund invests in more than 25 countries across 4 continents," Lowcock said.
"It gives a broad exposure to the developed world, though has a heavy weighting to the US – over 60 per cent of the portfolio is in North America."
The £674m Vanguard portfolio has returned 77.32 per cent since its launch in June 2009, falling short of its FTSE Developed ex UK Index benchmark by 2.59 percentage points.
Performance of fund vs sector and index since launch
Source: FE Analytics
While the portfolio requires a high minimum direct investment, it is available on platforms for around £1,000. It has an OCF of just 0.3 per cent, making it one of the cheapest options in the IMA Global sector.
10% in emerging markets – BlackRock CIF Emerging Markets Equity Tracker
Emerging markets are a favourite with investors looking for growth over the long-term, but many of the funds in the sector come with high charges.
For low-cost access to the region, Lowcock recommends the BlackRock Emerging Markets Equity tracker.
It has made 7.22 per cent over the last three years, in line with the IMA Global Emerging Markets sector, which is up 9.12 per cent, according to FE Analytics.
The fund tracks the FTSE All World Emerging Markets index, which it has marginally outperformed over the period. The index is heavily tipped towards financials, at nearly 30 per cent.
It has an OCF of just 0.28 per cent.
Among the top-10 holdings in the fund are Taiwan Semiconductor Manufacturing – a favourite among actively managed portfolios such as Aberdeen and First State – China Mobile and the Bank of China.
30% in fixed income – SSGA SPDR Barclays Sterling Aggregate Bond ETF (UKAG)
"For the bond section of the portfolio, this ETF gives one of the widest exposures," Lowcock continued.
"It invests in high-quality corporate and government bonds but limits currency risk by holding only sterling."
The ETF has made 17.68 per cent since its launch in June 2011 – around the same as the IMA Sterling Corporate Bond and IMA Sterling Strategic Bond sector averages. It has an OCF of 0.2 per cent.
10% in alternative assets – HSBC FTSE EPRA/NAREIT Developed ETF (HPRO)
"This fund holds almost 300 property companies from around the developed world, with a TER of 0.4 per cent," Lowcock said.
"It is a specialist asset class that is less correlated with shares and bonds, but should be seen as a long-term holding."
The majority of the ETF’s exposure is in North America, at 50.14 per cent, followed by the Pacific basin, Japan and Australasia.
Its largest holding is Simon Property Group – a US commercial real estate company specialising in regional malls and outlet shopping centres.
HSBC FTSE EPRA/NAREIT Developed ETF has an OCF of 0.4 per cent.
Lowcock says these specialist ETFs are a good option for sophisticated investors, but warns they are not without their risks.
"The lowest-cost ETFs may replicate the index synthetically – meaning they use derivatives to replicate the market," he said.
"These are often more accurate than physical funds, which invest directly, but come with different risks; if the bank providing the derivative gets into problems, the fund would probably be wound up."
"For an unsophisticated investor, a physical fund will undoubtedly be a better choice."