Tracker fund charges heading towards zero

Tracker fund charges could go all the way to zero, according to new research by S&P Dow Jones Indices.

The report argues due the growing popularity of tracker funds, which now account for 13p of every £1 invested by UK investors, fund management groups may be willing to employ a loss leader strategy.

Angana Jacob, associate director of global research and development at S&P, says such a move would enable the fund manager to retain scale benefits.

She argues that fund managers may opt to charge high fees on other funds, such as smart beta and multi asset, in order to boost their margins.

"If large players decide to employ a loss leader strategy to attract investors, we could see business models developing around charging high fees for active," says Jacob.

Tracker fund attractions

The S&P report notes there is growing scepticism over active funds' ability to add value. Indeed, there have been various studies over the past couple of years that have shed a poor light on the performance of active funds.

Lower costs, with some tracker funds charging less than 0.1% versus typically around 0.9% for an active fund, is a key attraction.

Simplicity is another: investors - particularly those who are younger - favour the certainty offered by a fund that will do what it says on the tin. With active funds, in contrast, investors hope the manager outperforms the index.

"The fee issue, especially in the current low return world, is critical to competitiveness in the market," adds Jacob."Consumers care about fees, they care about costs which eat into their returns, and this comes through in the fund flow data, which shows increasing passive allocations."

From 2009 to 2014 more than 60% of all funds in Morningstar's database reduced their fees. The majority were tracker funds, thanks to a price war that has broken out between some the biggest players in the space, including BlackRock and Vanguard.

The sharp fall in fees has gone hand in hand with a growth in passive investment products.

Over six years from 2009-2015, passively managed funds, including exchange traded funds (ETFs) and index funds have grown by 73%, rising from 11% of global assets under management in 2009 to 19% in 2015.

More specifically, exchange-traded funds (ETFs) have been growing at an annual rate of around 30% for the past decade with current assets under management at above $3 trillion (£2.3 trillion).

Actively managed funds in Europe lowered their charges by 5%. The downward trend is most pronounced among passive funds which lowered their charges by 42%.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.