Expensive underperforming funds exposed

While the launch of low-cost products such as the Fidelity Multi-Asset Allocator range shows a growing trend of driving the cost of investing down, many funds are still getting away with charging high TERs without delivering on performance.

"The multi-manager, Emerging Markets and Absolute Return sectors have far too many expensive underperforming funds," said Patrick Connolly, head of communications at AWD Chase de Vere. "It’s the job of advisers to separate the wheat from the chaff."


BlackRock UK Absolute Alpha

Absolute Return funds cost more than the standard unit trust because they are more sophisticated and use extra tools. Fund houses routinely take a cut for significant outperformance and initial charges are often high.

With more than £1.2bn in assets under management, Mark Lyttleton and Nick Osborne’s BlackRock UK Absolute Alpha is one of the more popular funds in the sector. However, with returns of just 3 per cent in the last three years compared with 12 per cent from the sector average, the fund has struggled to meet investors’ expectations.

"The performance has been a little disappointing over the short-term but since launch the fund has met its absolute return target," said Tony Stelling, head of UK retail sales at BlackRock.

"The Absolute Return sector has a broad range of different strategies and the IMA has said that the sector is not there for comparative purposes. Investors who look at our fund compared to the average are not comparing eggs with eggs."

Considering the fund has an above-average TER of 1.93 per cent, its 12-month performance is disappointing. For a fund that aims to achieve an absolute return in all market conditions, some investors might find a loss of 7.4 per cent difficult to swallow.

Stelling added: "One component part of the TER is the performance fee and that will not be included this year so investors can expect the charges for the year to fall."

While the charges on the BlackRock fund are above average for an Absolute Return fund, it is by no means the most expensive in the sector. The Insight Diversified Target Return fund has also underperformed while charging investors an eye-watering 2.28 per cent TER. Our data shows the fund has lost 1.76 per cent over five years.


SWIP Multi-Manager UK Equity Income

Since multi-manager funds invest in other collective schemes, an extra layer of expense is common. Investors pay a premium for outsourcing their investment decisions to a professional, and having a full-time fund manager at the helm should bring unit holders the peace of mind to take a hands-off approach and watch their wealth grow over the long-term.

Some funds struggle to justify these higher charges, though. Data from FE Analytics shows that the SWIP Multi-Manager UK Equity Income fund has lost 6.04 per cent over five years compared with a loss of 0.53 per cent from the average UK Equity Income fund and a return of 10.7 per cent from the fund’s benchmark – the FTSE All Share. Over one and three years it has performed relatively in line with its sector.

A TER of 1.81 per cent – one of the highest in the sector – adds further insult to injury. The fund’s many investors are paying extra to see the £1.2bn fund underperform.

The SWIP Multi-Manager UK Equity Focus and Multi-Manager UK Equity Growth funds have also underperformed over three and five years in the UK All Companies sector.

"In July 2010 the management of the SWIP MM UK Equity Focus and the SWIP MM UK Equity Income funds were brought in-house to SWIP having previously been managed by Russell Investments," said a spokesperson from Scottish Widows Investment Partners.

"Under the expertise of the SWIP MM team, these funds have been reviewed and new managers were appointed where SWIP felt it was appropriate."

"As a result of the change there has been an improvement in the performance of these funds which we feel is sustainable given the quality of the underlying managers."


HSBC GIF Global Emerging Markets Equity

The charges associated with investing in underdeveloped markets such as Brazil, Russia, India and China are often higher because company analysis is not so readily available. Product providers must spend a lot more time and resources visiting companies, delving into accounts and understanding often opaque business practices.

The advantage for investors who are willing to pay these additional charges is that they get access to a managed fund in regions offering the world’s most promising growth prospects.

Not all funds meet this objective, though. The HSBC GIF Global Emerging Markets fund carries a TER of 1.92 per cent – hefty even by emerging markets standards – and has underperformed in the last three and five years. According to FE Analytics, over five years it has returned 20.71 per cent, less than half of the average sector return of 43.77 per cent.

HSBC Global Asset Management declined to comment.


This study follows a call from Vanguard for the fund management industry to change the way charges are structured.

"Performance-related fees are just one example of the barriers to an investor understanding what they are paying for," said Tom Rampulla, managing director of Vanguard UK. "Vanguard believes that for actively managed funds, the investment adviser’s compensation should increase and decrease depending upon how the fund performs relative to an appropriate benchmark over time. This aligns the adviser’s interests with the investors’ interests."