June 19, 2009 6:38 pm

Fund costs fall as Vanguard arrives in UK

UK investors are set to enjoy the lowest ever costs for fund investing, following the launch of 11 index trackers from US low-cost manager Vanguard.

From Monday, Vanguard will begin accepting investments into its new FTSE All-Share Index fund charging 0.15 per cent a year. By contrast, existing index tracker funds can cost up to 10 times that amount. Threadneedle’s UK Index Tracker charges 1.5 per cent annually and Virgin’s UK Index Tracking unit trust charges 1 per cent. Vanguard is also offering US, European, Japanese and emerging market trackers, with annual charges ranging from 0.25 to 0.55 per cent a year, plus three bond trackers charging between 0.15 and 0.25 per cent.

Announcing the launch, Vanguard’s UK managing director, Tom Rampulla, said: “We are confident that these funds have among the lowest total expense ratios in their peer groups.”

Investors in the UK index funds will have to pay a 0.5 per cent purchase fee to cover stamp duty – and the Pacific, emerging market and bond index trackers will initially carry fees to cover start-up dealing costs.

But independent financial advisers (IFAs) still believe the Vanguard funds could be more cost-effective than exchange traded funds (ETFs). Jason Butler of Bloomsbury Financial Planning said: “This should provide some really good competition among index funds and active funds. It will really shake up the actual costs of passive investing.” By comparison, he pointed out that the Lyxor FTSE All-Share ETF has a annual management fee of 0.4 per cent.

However, investors will only be able to buy Vanguard’s funds through fee-based IFAs, who may charge an additional 1 per cent for advice. The US company has so far failed to reach agreements to make its funds available through execution-only brokers or fund supermarkets.

TD Waterhouse will not be offering the funds on its low-cost platform, as Vanguard will not share its fees. “We couldn’t work out a mutually-acceptable commercial relationship,” said James Daly, TD Waterhouse’s business development representative. Hargreaves Lansdown is still in talks, while Barclays Stockbrokers and Fidelity Funds-Network are awaiting developments. Vanguard will accept direct investments from private investors but requires a minimum of £100,000 per fund.

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