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Daily Mail
2 days ago
- Business
- Daily Mail
The expensive funds that ARE worth paying for
If there's one thing that's guaranteed to gnaw away at your wealth, it's fees on the funds you invest in. Managers take a slice of your investments every year – and the more they take, the less there is left for you. The impact can be dramatic. If you put £10,000 in a fund that earned 6 per cent a year, you would be sitting on £38,131 after 25 years if the annual fees were 0.5 per cent. But if fees were 1 per cent you'd have just £33,865, and if they were 2 per cent you'd have £26,662 – and would have paid £16,250 in fees. So why would you ever pay fees for a fund that are several times higher than others that hold investments in the same sector? We investigated if it's ever worth paying for the most expensive funds available. What is expensive? Fierce competition and regulatory pressure have forced down fees over the past decade to ensure that investors get a better deal. Actively managed investment funds – those curated by an expert – now charge an annual fee of 0.89 per cent on average, according to regulator the Financial Conduct Authority. Passive funds that follow an index instead of relying on experts are cheaper still – sometimes as low as 0.1 per cent a year. But research for Wealth & Personal Finance reveals there are still 255 funds that charge 1.5 per cent or higher. Their annual charge is a hefty 1.69 per cent on average, compared with the average across their rivals of 0.66 per cent. For every penny more an investor pays in charges, the manager must produce greater returns to outperform the market. Analysis of the funds by research firm Morningstar shows they don't always manage it – but some do. Some 17 of the 255 dearest funds were in the bottom 10 per cent (decile) of performers in their fund sector over one, three and five years. A further 10 were in the bottom decile for two out of three of these time periods. But several funds have consistently outperformed. Eight funds were in the top decile of their sector in all three time periods, and a further seven were top in two out of three of the periods. The Artemis UK Select fund, for example, charges 1.55 per cent compared to an average charge of 0.4 per cent across the UK All Companies sector. It is a top performer over all three time periods and has delivered annualised returns of 19.5 per cent over five years. The Schroder Income fund charges 1.64 per cent, more than double the 0.8 per cent average for its peer group. Over five years it has produced annualised returns of 15.3 per cent, putting it in the top decile of its sector. Ben Yearsley from fund experts Fairview Investing says: 'There is an unhealthy obsession with fees, but the fact is there is no real correlation between charges and performance. If you can deliver consistently after fees, regardless of what the market is doing, then does it matter what the fee is?' When it is worth paying more Darius McDermott, from ratings agency Fund Calibre, says: 'No one should say that charges don't matter, because they do, but the more important question is: did you pick the right fund? Because the right fund will still outperform, even if it is more expensive.' The first check to decide if it is worth paying for an expensive fund is to compare it to similar ones. If you can find another fund doing the same thing for much less, consider switching. Take a look at the annual performance after fees. If the performance is higher even when fees are factored in, it may be worth the money. Also check how much money is invested in the fund – a statistic known as the assets under management (AUM). This information should be easily available in the fund's key investor information document. Smaller funds are sometimes justified in charging more because many of the running costs are fixed, such as the authorisation and legal costs. However, as the fund grows they should pass on the savings, says Yearsley. 'Funds should be passing on the economies of scale as they grow – a £20 billion fund charging 2 per cent would be hard to justify,' he adds. Funds in specialist areas, such as property or infrastructure, may also have higher costs, which are passed on to investors. When checking how well a fund is doing, Yearsley recommends that you should look at the performance across individual years, rather than cumulative figures across several. 'This will help you see a pattern: whether the fund is routinely under- or over-performing, rather than having one very good or bad year that has distorted the overall picture,' he says. These figures can be found on the fund factsheet or through investment platforms and fund research websites. ...and when to switch Paying more does not always get you more – you may be able to invest in the same fund for cheaper simply by switching share 'class'. Some funds have several share classes, which are the same except for their price. Older, so-called 'legacy' share classes, tend to be more expensive because they were created before regulation forced fund managers to strip out commission fees and other excess charges from the cost of investing. Ask your investment platform or contact the fund firm if you are not sure if a cheaper version is available. McDermott points to the Jupiter India fund as one example. It is a top-performing fund, but investors in its most expensive L share class have seen returns of 166 per cent over five years, while those in its cheapest X share class enjoyed 180 per cent returns. 'Even the most expensive share class has beaten the market, but it does still affect your returns,' says McDermott. 'The greater the performance, the bigger the impact of the charges.' So how do funds justify their higher fees? Toby Gibb, head of investment solutions at fund house Artemis, says it is doing its best to encourage investors out of more expensive share classes and that most were now in cheaper versions. He adds: 'If managers are to do better than the market, they must conduct huge amounts of research, and often need specialist external research too. We think the long-term performance of these funds demonstrates that that's worth paying for.' A Schroders spokesman says: 'Our goal is to ensure that clients are invested in the share class that provides the best value based on their investment approach. 'We conduct a semi-annual automatic conversion to cheaper share classes for investors that have had their adviser removed.' Jupiter has been approached for comment. How to work out what you're paying Check the fund factsheet. This should list the annual management charge (AMC), which is displayed as a percentage. It might also be called the ongoing charge figure (OCF) or total expense ratio (TER). Check which share class you are in. Some investment platforms offer cheaper share classes, so you will need to check with your platform exactly what you're paying. Don't forget other fees. Remember the fund charge is on top of your platform fee, so factor this into calculations when considering the overall cost of investing.
Daily Mail
4 days ago
- Business
- Daily Mail
Income investors back cheap passive funds to save on fees - but are they missing out on returns?
Investors are increasingly shifting their holdings towards passive funds as low fees continue to drive inflows. Active UK fixed income funds across all sectors saw outflows of £15.87billion between January 2022 and the end of March 2025, while inflows into passive fixed income holdings saw inflows of £14.29billion, according to data from Rathbones. More recently, active fixed income funds saw outflows of £1.99billion in the first quarter of 2025, while passive funds again saw inflows of £878.33million. Choosing passive funds means investors will be saving money on their management fees, with passive fund fees generally significantly cheaper than active counterparts. However, it may also mean that they are sacrificing returns over the long term. Darius McDermott, managing director at Fundcalibre, said: 'Many "cautious" passive strategies ended up losing investors more than half their capital. 'Even when long-duration Government bond yields turned negative for a period of time, these strategies kept buying, simply because the index told them to. 'Everyone knew it was irrational. It shows why active is still very important.' Which passive funds are outperforming? Despite outflows, gross sales for active funds in the first quarter – that is, how much money they generated over the period – were £9.95billion, compared with £5.78billion for passive funds during the same period. Bryn Jones, head of fixed income at Rathbones Group, said: 'Assets under management in passive fixed income funds have held up despite there being significant underperformance in general and the significant difference in flows recently is really striking. He added: 'Too many clients are focusing on price when they select fixed income funds, with the result that they opt for underperformance while not fully understanding the option they are taking.' Rathbones says its Rathbone Ethical Bond Fund (ongoing charge: 0.66%) outperformed well-known passive funds in the IA Sterling Corporate Bonds sector by more than ten per cent over the past five years. Over the past ten years, the fund's growth was a third higher than bonds in popular passive funds. Even then, the Rathbones fixed income fund in question delivered a six per cent return over the past five years according to Trustnet data. Meanwhile, the M&G Short Dated Corporate Credit Bond fund (ongoing charge: 0.25%) returned 17.9 per cent, while the AXA Sterling Credit Short Duration Bond fund (ongoing charge: 0.408%) returned 13.9 per cent over the same period. Where does active pay off? McDermott says fixed income markets have had a rocky few years. He told This is Money: ' Inflation shocks, aggressive rate hikes and shifting central bank rhetoric have all made it a challenging environment for backward-looking passive bond strategies to keep up. 'In contrast, active managers have been able to adapt their positioning, taking advantage of opportunities and managing risk more effectively.' To benefit from an active approach, McDermott tips GAM Star Credit Opportunities (ongoing charge: 1.55%) and Liontrust Monthly Income Bond (ongoing charge: 1.03%) for their experienced managers. GAM, he says, 'leans into subordinated financial debt where yields are attractive, while Liontrust takes a macro-driven, defensive approach that has helped it protect capital during volatility.' McDermott also tips Nomura Global Dynamic Bond fund (ongoing charge: 0.7472%). He said: 'As a strategic bond fund, it has the freedom to move across the entire fixed income spectrum, and the manager has consistently delivered in terms of both income and capital return across different market conditions.' Leah Bramwell, investing expert at Canaccord Wealth, also tips two strategic bond funds, Jupiter Strategic Bond fund (ongoing charge 0.71076%) and Aegon Strategic Bond fund (ongoing charge 0.5844%). Bramwell said: 'In fixed income, active management can add significant value over passive options in some areas. 'By design, fixed income indices allocate higher weightings to the largest bond issues/issuers. Whilst this makes sense in the context of equities – investors are allocating to the companies with the largest market caps – it is less appealing when considering debt. 'In an ideal world, an investor would prefer to have higher exposure to companies with lower debt loads, as this should imply stronger balance sheets and less likelihood of default.' Bramwell tips Man GLG Sterling Corporate Bond (ongoing charge: 0.6185%), the manager of which she says 'employs a bottom-up approach with equity-like analysis on his positions. She adds: 'In all cases, investors should be clear on what risks they are taking around credit and duration, and how much they are being compensated for those risks through a higher return.' IA Sterling Corporate Bond fund performances Fund Name Yield (%) 1Y (%) 3Y (%) 5Y (%) M&G Short Dated Corporate Bond I GBP 4.54 6.5 16.1 17.9 AXA Sterling Credit Short Duration Bond Z Gr Acc 4.51 6 12.9 13.9 BlackRock Sterling Short Duration Credit D Acc 4.1 6.8 12.2 12.8 Fidelity Short Dated Corporate Bond W Acc 4.33 5.9 11.9 12.8 WS Canlife Short Duration Corporate Bond C Acc GBP 0 5.9 12.7 12.7 Royal London Inv Grade Short Dated Credit Z Inc 4.9 6.8 12.8 11.9 L&G Active Short Dated Sterling Corp Bond I Acc 4.2 5.9 10.7 11.7 abrdn Short Dated Corp Bond Institutional Acc 5.06 6.4 12.4 10.9 Schroder Sterling Corporate Bond Z Acc 5.72 6.7 7.3 10.9 iShares Corp Bond 0-5yr UCITS ETF GBP 0 5.9 11.8 10.9 CT Sterling Short Dated Corporate Bond Ini GBP 4.54 5.8 12.2 10.7 IFSL Church House Inv Grade Fixed Interest Inc 4.66 5.3 11 10.5 L&G Short Dated Sterling Corp Bond Index I Acc 4.5 6.2 11.8 10.4 Royal London Corporate Bond M Acc 5.18 6.7 10.8 9.9 Artemis Corporate Bond I Acc GBP 5.37 5.3 8.3 8 Royal London Sterling Credit M Acc 5.09 7 10.2 7.9 Vanguard UK Short-Term Inv Grade Bond Index Acc GBP 4.11 6.3 10.2 7.6 M&G Strategic Corporate Bond I Acc GBP 4.47 4.1 8.6 7.4 EdenTree Short Dated Bond B 3.24 5.1 9 7.1 abrdn Short Dated Sterling Corp Bond Tracker B Acc 4.53 5.9 9.4 6.9 Liontrust Sustainable Future Monthly Income Bond B Gr Inc 5.78 4.8 6.3 6.3 Rathbone Ethical Bond Fund I Acc GBP 5.1 5.3 8.6 6 SVS Sanlam Fixed Interest B Inc 4.43 7.1 9.4 5.5 BNY Mellon Global Credit W Hedged Acc GBP 3.39 6.2 11.1 5.5 Rathbone High Quality Bond Fund I Acc GBP 4.2 5.5 9.6 5.4 Premier Miton Corporate Bond Monthly Income C Inc GBP 5.2 6.3 9 5.3 Invesco Corporate Bond (UK) Z Acc 4.38 4.2 8.3 5.2 BlackRock Corporate Bond 1 to 10 Year D 4.54 6 8.9 5.1 Source: Trustnet Are equity investors also too keen on passive funds? The US has dominated global equity markets in recent years, with the S&P 500 delivering healthy returns in recent years. As a result, many retail investors have shifted their holdings towards cheaper passive funds from active alternatives. In 2024, passive funds recorded $1.4trillion of inflows, compared to $1.2trillion of inflows for active funds. Bramwell warns: 'It has been a challenging environment for active managers over the last decade. 'An increasingly concentrated US, and therefore global, equity market, combined with growing levels of passive ownership, have coincided with a sustained period of underperformance for active management. However, she added: 'Active investing shows its worth particularly in inefficient markets. These are markets that are perhaps less liquid, less deep, featuring less or little analyst coverage, or in economies exposed to pressures that distort the market – such as the chronic net outflows seen in the UK causing a mispricing of assets.' Bramwell tips Fidelity Special Situations fund (ongoing charge: 0.92%), SPARX Japan (ongoing charge: 1.03%) and Pacific North of South (ongoing charge: 0.83%). Bramwell also tipped Polar Capital Global Insurance (ongoing charge: 0.8366%) for its 'consistently strong performance, and said specialist infrastructure funds such as FTF Clearbridge Global Infrastructure (ongoing charge: 0.8187%), and Lazard Global Listed Infrastructure (ongoing charge: 0.91%), have 'protected well on the downside versus passive benchmarks.' 'For more efficient markets, like the large cap US space, the data shows a clear inability of active managers to 'earn their fee' and consistently outperform their benchmark indices,' Bramwell added.
Globe and Mail
13-05-2025
- Business
- Globe and Mail
Six top stock picks in my favourite sector from BofA analysts
Daily roundup of research and analysis from The Globe and Mail's market strategist Scott Barlow Health care is my favourite sector because I don't have to worry as much about macroeconomic factors and the sector gets free growth from demographics. BofA Securities published a comprehensive health care report, including stock ideas, on Monday, 'Blame it on generalists' interest, ETF/passive inflows, but Health Care stocks are more correlated with one another than ever … Health Care is near a max overweight by active funds vs. Tech perhaps due to China/tariff risks. But the advent of a 'beautiful deal' with China may set the stage for a relief rally in Tech vs. Health Care, especially as Tech EPS revisions have been relatively healthy … Health Care used to have net cash. Now it's as levered as Industrials, and its floating vs. fixed rate risk is the same as that of the S&P 500. More EPS volatility than Financials (another sector shift since the GFC). Health Care's 5yr EPS vol is now in-line with S&P overall, and risk may be mispriced in Pharma/Biotech (lower beta than the S&P 500 but with higher EPS volatility) … still ranks #2 In short-term sector model: Despite the risks above, S&P 500 Health Care ranks highly across valuation, earnings revisions and price momentum. Momentum may be reversing in cyclicals vs. defensives as we saw this week. We remain underweight Health Care in our S&P 500 sector strategy … Secular tailwinds still in force: AI, demographics: GLP-1 was a game changer in 2023 and AI/aging are long-term bullish themes. Aging demographics is the biggest source of increased entitlement spending going forward as retirement age has remained flat since 1983 vs a jump in expected lifespan' The six stocks as chosen by BofA analysts are Cardinal Health Inc. (CAH-N), CVS Health Corp. (CVS-N), Danaher Corp. (DHR-N), Eli Lilly & Co. (LLY-N), The Cigna Group (CI-N) and Thermo Fisher Scientific Inc. (TMO-N). *** The results of BofA Securities' fund manager survey (FMS) are in, summarized by investment strategist Michael Hartnett, 'Pre-Geneva (75% of FMS completed before announcement of US-China talks) investor sentiment glum, especially on US assets; May FMS not as extreme as uber-bearish April FMS (recession seen as less likely, cash levels cut to 4.5% from 4.8%, major tech reallocation), but bearish enough to suggest pain trade modestly higher given positive US-China trade war ceasefire (FMS investors expected 37% tariffs not 30%) … Investors less pessimistic: net 59% expect weaker global growth (vs 82% in April), net 1% say recession likely (vs 42% in April), 'soft landing' (61%) back as consensus outlook (hard landing 26%, no landing 6%) … investors most UW US dollar since May'06, slashed big bond OW to neutral, said gold most overvalued in 20 years ('long gold' = #1 crowded trade), trimmed global equity UW [underweight] via up-in-Europe not US stocks (most UW since May'23); FMS most OW large vs small cap since Jun'22, pre-Geneva big rotation to tech (biggest MoM rise since Mar'13) & industrials, out of staples, healthcare & energy (biggest UW on record). FMS Contrarian Trades: if 'no landing' most +ve for US stocks, EM, small cap, energy and -ve gold; if 'hard landing' most +ve health care and -ve Eurozone & banks' *** Citi U.S. strategist Scott Chronert assesses markets after the U.S. delay in China tariffs, 'In our weekend note, What Q1 Earnings Are Telling Us About Tariff Policy, we stressed the point that earnings growth expectations for the Cyclical and Defensive clusters within the S&P 500 continue to trend lower. On the other hand, the Growth cluster (esp. Mag 7) have continued to support full year index level consensus … our immediate takeaway is to presume a broader sentiment relief with the possibility of the S&P 500 working through our 5800 target. This probably includes some short covering among those parts of the market deemed as most exposed to China tariffs (i.e., Tech and Consumer Discretionary). However, so long as a 10% broad tariff remains an effective tariff line of sight, fundamental pressures should continue to linger. This makes it difficult to push valuations materially higher than the current 22.6x TTM [trailing twelve months] and 20.4x NTM levels … All told, we main constructive on the structural US equity set up, but expect a need to consolidate gains from the post Moratorium Day rally. Our preferred long expression is via Growth per OWs in Tech (esp SW[software] and Semis) and Comm Services' *** Bluesky post of the day: Diversion: 'The Early Returns on NYC's Congestion Pricing Are Pretty Impressive' – Gizmodo
