Our data suggests that those investors would be better off holding investment trusts, many of which charge less than 1 per cent per annum.
Many closed-ended funds have been removing their performance fees of late to make them even more appealing to retail investors.
Here we look at the large and liquid trusts in the mainstream sectors with the lowest charges.
UK equity income
In the UK Growth & Income sector, the cheapest option is now the City of London investment trust following the removal of its performance fee earlier this month. Ongoing charges on the £952m trust are just 0.45 per cent.
Job Curtis’s portfolio has delivered share price growth in excess of the FTSE All Share over three, five and 10 years and is currently yielding 3.91 per cent, according to data from FE Analytics.
The portfolio has won five FE Crowns for its performance, including the last three years when it has made 62.76 per cent compared with the index’s 43.33 per cent.
Performance of trust vs sector and index over 3yrs
Source: FE Analytics
Its top-10 holdings include HSBC, BAT, Glaxo and Vodafone, which are popular with UK equity income open-ended funds.
Its £1bn market cap also means there are unlikely to be any worries about liquidity.
Alastair Mundy’s £730m Temple Bar investment trust is almost as cheap, with ongoing charges of 0.51 per cent and no performance fee.
Mundy’s portfolio has outperformed the City of London trust over three, five and 10 years, making 239.78 per cent over the decade compared with the 140.83 per cent recorded by the FTSE All Share.
The £417m Dunedin Income Growth trust, managed by Jeremy Whitley for Aberdeen, also has very low charges, at just 0.62 per cent.
Investors will pay 0.65 per cent a year for access to James Henderson’s £349m Lowland Investment Company, while the £513m Merchants trust, managed by Simon Gergel, charges just 0.66 per cent a year.
None of the trusts have a performance fee.
UK growth
For anyone looking for cheap access to a growing UK economy, there are very few investment trust options with charges of less than 1 per cent.
The £1.4bn Mercantile trust, managed by Martin Hudson, Guy Anderson and Anthony Lynch for JP Morgan, stands out with charges of just 0.51 per cent.
It is a portfolio with more of a mid cap slant and it has been helped in recent months by large positions in housebuilders Persimmon, Bovis and Barratt.
It has returned 66.92 per cent over three years compared with 43.33 per cent from the FTSE All Share, despite having underperformed the index in early 2012.
Performance of trust vs indices over 3yrs
Source: FE Analytics
Returns over the period have been more or less in line with the FTSE 250, according to data from FE Analytics.
The £168m JP Morgan Mid Cap trust has done even better, returning 94.48 per cent in share price terms over the period. It is the next cheapest option, with charges of 0.8 per cent.
The £293m Schroder UK Growth trust, recently taken over by Julie Dean from Richard Buxton, is the next cheapest, with charges of 0.86 per cent.
Dean is in the process of rebalancing the portfolio as she wants it, but her open-ended fund has shown a strong bias towards mid caps in recent years.
This means that investors who want cheap access to UK large caps may prefer to stick with the income funds. However, the mid cap area of the market has been on a strong run for some time.
Global equity income
One of the cheapest options in the space is the London & St Lawrence Investment Company, which has ongoing charges of just 0.74 per cent.
The fund of funds is yielding 3.7 per cent and is on a narrow discount of 0.5 per cent.
It has 12.9 per cent invested in the Consistent UT Inc, 4.3 per cent in Law Debenture Corporation – a trust that also provides professional business services to companies – and 3.7 per cent in Witan – itself a fund of funds structure.
For such a wide variety of assets it is very cheap, especially compared with other funds of funds.
It invests in a number of the other trusts on this list, including Merchants, City of London and Dunedin Income Growth.
Its track record is very strong, too, up 58.42 per cent over three years, 85.71 per cent over five and 185.57 per cent over 10. It has beaten the FTSE All Share over each time frame.
Also charging 0.74 per cent is the £405m British Assets Trust, managed by Phil Doel for F&C.
Performance has been disappointing of late, with the trust lagging its bespoke benchmark – 80 per cent in the FTSE All Share and 20 per cent in the FTSE World ex UK – over three years.
It has made 33.88 per cent over this time compared with the 41.08 per cent from its benchmark.
Performance of trust vs sector and benchmark over 3yrs
Source: FE Analytics
It is currently yielding a healthy 4.4 per cent, however, and is on a discount of 3.8 per cent – rare for a portfolio with an income focus.
The £346m Scottish American Investment Company, managed by Baillie Gifford, has ongoing charges of 0.93 per cent, while Martin Currie’s £177m Securities Trust of Scotland charges 0.99 per cent.
Global growth
There are much cheaper options in the global growth sector for those less concerned about yield.
The £626m Bankers trust, run by Alex Crooke for Henderson, is another to remove a performance fee in recent months. It has ongoing charges of just 0.45 per cent.
The trust has produced top-quartile share price returns over three, five and 10 years, while it has had a particularly strong past 12 months.
Over one year the trust has made 37.62 per cent while the FTSE All Share has made 20.17 per cent, according to data from FE Analytics. This is the second-best result in a sector of 34 trusts.
Performance of trust vs sector and index over 1yr
Source: FE Analytics
Baillie Gifford’s £2.3bn Scottish Mortgage, managed by James Anderson and Tom Slater, charges just 0.51 per cent.
The Foreign & Colonial Trust, a £2.1bn portfolio run by Jeremy Tigue for F&C, charges just 0.56 per cent. It is on a discount of 10.2 per cent and has a yield of 2.4 per cent.
Baillie Gifford’s £843m Monks Investment Trust, managed by Gerald Smith and Tom Walsh, charges just 0.56 per cent and is on a discount of 14.6 per cent.
Neither have as strong a track record as Bankers, though.
