With so few fund managers able to beat their respective benchmarks consistently, many investors have questioned the wisdom of paying an annual charge of 1.5, 2 or even 2.5 per cent, instead preferring a tracker fund that should duplicate the index for a fee of below 0.2 per cent in some cases.
Some fund houses, however, have made an active effort to bring down the charges of their products in order to make them more attractive relative to trackers.
Moreover, the rise of clean share prices in the wake of RDR should see fund charges come down even further.
There is also the issue recently raised by FE Alpha Manager Toby Ricketts (pictured), who says the tracker craze could be on borrowed time.
He points out that the huge amount of money pouring into trackers has inflated the prices of the largest constituents of the index. Given the expensive valuations of these stocks, he predicts that value-conscious investors will pull more and more money out of them, which could see trackers suffer much more than active managers who can avoid these areas of the market and look for better value elsewhere.
For those who remain focused on costs, an active fund with a low management charge arguably gives investors the best of both worlds. Of course, this argument breaks down if the fund in question badly underperforms, but there are a number of cheap options with experienced management teams that have a proven track record of delivering the goods.
Here are a few examples to get you started.
Aviva Inv UK Smaller Companies – OCF 1.38 per cent
This £96m vehicle has a low ongoing charges figure (OCF) at 1.38 per cent; this is particularly impressive given that it focuses on small caps, which are often more expensive to research.
It has four FE Crowns and has consistently beaten its sector and benchmark in recent years. Our data shows that it has returned 156.32 per cent since Robin West and Tony Belsom took it over in May 2005, outperforming the IMA UK Smaller Companies sector average and FTSE Small Cap (ex IT) index, with less volatility.
It has also outperformed over three and five years
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
West and Belsom are invested predominantly in companies with a market cap of between £50m and £1bn, which the management defines as small caps. The remaining assets are invested in micro caps and mid caps.
Top-10 positions include Ted Baker, Cineworld and Restaurant Group. Industrials is the biggest sector weighting, followed by consumer services and financials.
The fund is available via a number of platforms for no initial charge.
Fidelity Moneybuilder Dividend – OCF 1.22 per cent
Michael Clark’s £618m fund has five FE Crowns, and has beaten its benchmark with less volatility since he took over in July 2008.
Performance of fund, sector and index since July 2008
Source: FE Analytics
The fund tends to significantly underperform during fast-rising markets, but its ability to protect against the downside has led to it winning out overall over the six-year period.
Clark invests predominantly in dividend-paying large caps, counting tobacco, utilities and healthcare as his three biggest sector weightings. GlaxoSmithKline, AstraZeneca and Imperial Tobacco are all major holdings.
The fund, which is currently yielding just over 4 per cent, is available via all major platforms for no initial charge. It has an OCF of 1.22 per cent, making it one of the cheapest funds in the IMA UK Equity Income sector.
CF Adam Worldwide – OCF 1.38 per cent
This is the least well-known of all of the funds on the list, but has a track record that even the largest asset manager would be envious of.
It invests predominantly in developed equities, with just 8 per cent in emerging markets. The UK and US are the two biggest regional positions, with a weighting of 57 and 17 per cent respectively.
Managers Anna Croze and Mark Ivory invest in both funds and individual shares, counting the Scottish Oriental Smaller Companies trust, Roche and Shell as top-10 holdings.
The fund has fallen slightly short of its sector and composite benchmark – split 50/50 between the FTSE All Share and FTSE World ex UK indices – in recent years, but its long-term record is very strong. CF Adam Worldwide has returned 181.52 per cent over the last decade, beating its benchmark by around 40 percentage points.
Performance of fund vs sector and benchmark over 10yrs
| Name | 1yr returns (%) |
3yr returns (%) | 5yr returns (%) | 10yr returns (%) |
|---|---|---|---|---|
| CF Adam Worldwide | 16.36 | 39.36 | 62.31 | 178.86 |
| Benchmark | 20.37 | 41.7 | 55.1 | 142.13 |
| IMA Global | 21.82 | 34.47 | 43.76 | 116.4 |
Source: FE Analytics
The £30m fund has an OCF of just 1.38 per cent, although on the majority of platforms it requires a small initial charge of between 1 and 3 per cent.
Somerset Emerging Markets Dividend Growth – OCF 1.3 per cent
Emerging markets funds tend to be more expensive than those that focus on developed equities, as they require more research; however, Edward Lam and Edward Robertson’s Somerset Emerging Markets Dividend Growth portfolio is one of the few exceptions, with an OCF of just 1.3 per cent.
The fund targets capital growth and income by investing in a regionally diversified portfolio of 44 emerging markets stocks. It has been very successful since its launch in March 2010, returning 22.37 per cent, compared with -0.31 per cent from the IMA Global Emerging Markets sector average and 0.2 per cent from the MSCI EM index.
Performance of fund vs sector and index since launch
Source: FE Analytics
The five crown rated-fund has also been significantly less volatile, and has a decent yield at 3.3 per cent.
Lam and Robertson’s biggest regional bet by some distance is the Asia Pacific region, at 42 per cent. This is followed by South America at 15 per cent, emerging Europe at 12 per cent and South Africa at 8 per cent. The managers currently have a hefty weighting to cash – 11 per cent, according to FE data.
Although the fund has only recently celebrated its three-year anniversary, it has already amassed £295m. It is available across most major platforms for no initial charge.
Standard Life Inv Global Equity Income – OCF 1.08 per cent
This fund has only been headed up by Kevin Troup since January 2012 and is by no means the best performer in its sector; however, with an OCF of just 1.08 per cent it is cheaper than many trackers and so is likely to be of interest to cost-conscious investors.
The £103m fund aims for income as well as capital growth, investing predominantly in developed market equities. Assets are split relatively evenly across the UK, Europe and US, with Glaxo, Sanofi and Home Depot all featuring in the top-10. It is highly diversified, with more than 70 holdings in all.
The fund has a strong medium- and long-term record which has earned it four FE Crowns.
Over the past 10 years it has beaten its IMA Global Equity Income sector average and benchmark by almost 50 percentage points.
Performance of fund vs sector over 10yrs
Source: FE Analytics
One of the major drawbacks is its relatively low yield of just 2.2 per cent, although it is worth pointing out that the majority of Global Equity Income funds are struggling to break 3 per cent at the moment.
Standard Life Global Equity Income is available across all major platforms for no initial charge.