May 27, 2014 1:27 pm

Fidelity cuts passive fund charges to lowest level

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Fidelity Worldwide Investment has cut the charges on its index tracker range to the lowest ever level for UK retail investors, as competition among passive fund providers intensifies.

The fund group has reduced fees on its seven-strong range to as low as 0.07 per cent a year on its UK tracker fund and 0.08 per cent on its US fund, when purchased through Fidelity’s fund supermarkets.

These lower-cost fees, which represent the “ongoing charges figure (OCF)” – the approximate total cost of the fund – will put pressure on the group’s rivals.

Hargreaves Lansdown, for example, offers the Legal & General UK 100 Index trust with an OCF of 0.09 per cent as its cheapest index tracker.

Other index tracker providers, such as BlackRock, Vanguard and HSBC, charge in the region of 0.15-0.17 per cent.

Some trackers, such as the Virgin FTSE All-Share, are as expensive as 1 per cent a year.

More than £7bn of savings still sits in UK trackers with ongoing charges of 1 per cent or above, according to data from the Investment Management Association (IMA).

Fidelity said its index tracker range will also carry reduced fees when bought through other “fund supermarkets”, for an extra 0.02 per cent above the provider’s own supermarket price.

The Fidelity Index UK fund, for example, will cost 0.09 per cent and the US fund 0.10 per cent via other supermarkets.

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John Clougherty, head of UK retail at Fidelity, said: “There is increasing demand for passive products. Many investors now use index funds as a core component. Price is the biggest determinant of fund flows in the index-tracking market.”

Fidelity’s price cut comes only a few months after the group aggressively launched its index tracker range with revamped charges to compete with other fund providers and platforms. The UK and US index funds were previously priced at 0.09 per cent.

Hargreaves Lansdown, the UK’s largest execution-only supermarket, struck a deal with BlackRock and Legal & General Investment Management to offer lower-cost tracker funds through its platform, amid heated competition to attract investments.

Indeed more investors are turning to trackers as a cost-effective way to gain access to global markets. About £76bn was invested in tracker funds at the end of March, representing nearly 10 per cent of total assets under management in funds for UK retail investors.

However, despite the escalating pressure on prices, the total cost of purchasing trackers through platforms has in some cases risen, when other charges such as the supermarket fee are added on.

Fund supermarkets introduced a “service charge” earlier in the year, just as new rules came in which meant they could not receive commission for selling funds. This commission had previously been embedded in product fees.

As a result, fund groups launched “clean” fund shares which exclude commission, while platforms introduced a service charge to make up for this lost revenue.

But in some instances, the changes mean investors will pay more to buy tracker funds under the new regime.

For example, Hargreaves Lansdown previously charged £2 a month to hold certain tracker funds, meaning an annual cost of £24, plus the tracker’s OCF.

The new service charge levies a 0.45 per cent fee on total fund assets below £250,000, plus the OCF.

An investor with £10,000 in trackers, for example, will have to pay a service charge of £45 plus the product OCF. Hargreaves also has other charges on top, such as fees for dividend reinvestment, which customers need to consider.

By comparison, Fidelity charges 0.35 per cent on assets in funds below £250,000, while Cavendish Online and Charles Stanley Direct charge 0.25 per cent.

Some supermarkets offer exchange-traded funds (ETFs), which also track indices.

Although tracker funds and ETFs are similar, there are important differences between them. Tracker funds price once a day and can be bought through most supermarkets with no dealing costs, whereas ETFs trade on the stock market and therefore price throughout the day, bought and sold like shares.

Price competition is heating up in the ETF arena, as more providers battle to attract assets. Deutsche Asset and Wealth Management has recently added to its range of low-cost “core ETFs”, most of which have all-in-fees of 0.09 per cent a year.

The provider has unveiled an ETF tracking the MSCI USA index, which physically replicates the benchmark by holding the constituent shares.

Rival iShares is likely to announce price cuts next week.

Investors should be aware not all supermarkets offer ETFs, and that there are dealing fees for buying and selling shares. However, overall costs are now lower in many cases because ETFs do not incur the platform fee charged on fund assets.

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