Investors ‘twice as likely’ to choose active funds over trackers – Lipper
Retail investors in the UK are twice as likely to pay more for actively-managed funds than reduced costs for index trackers, research from Lipper has revealed.
A study looking into fund charges showed £56.6bn is invested in funds of funds compared to £30.5bn invested in index tracking funds. Lipper said this shows investors are willing to pay more for fund selection rather than choose a passive vehicle.
Commenting on the recent debate on fund charge disclosure, Ed Moisson (pictured), head of UK & cross-border research at Lipper, said: “Having been researching this subject since 1999, I continue to believe that transparency and awareness of the ‘drag’ of charges on returns are crucial for long-term investors.”
However, he added that while a single figure charge may be welcome by some parts of the industry, he fears ‘oversimplification’ may be just as damaging as complicated fee structures.
“The problems of oversimplification should not be underestimated. For example, including income related to securities lending in a charge figure seems instinctively wrong; while the most important part of a performance fee to understand is its structure.”
Moisson also criticised the UK FSA for failing to act when it comes to investors’ understanding of performance fees.
He said in 2008 the regulator stated “consumers unfamiliar with this charging structure may not be able to make appropriate comparisons or understand their impact on net returns in the absence of a significant improvement in standards of disclosure or literature”.
However, the regulator has done nothing to address this shortfall, he said.
“Also, when performance fees were first allowed and the [UK] Financial Services Consumer Panel expressed concern about a lack of caps on such fees, the FSA responded by saying this issue would be covered by its conduct of business rules that prohibited excessive fees, but then removed its rules on excessive charges.”
Although there have been some moves by fund groups to address fee-related issues ahead of the UK Retail Distribution Review, Moisson said he doubts there will be further changes on charging transparency until “investors vote with their feet (or their pockets)”.
This article was first published on Investment Week