Legal & General Investments has cut charges on a number of its index funds by up to a quarter as part of an effort to respond to growing interest among UK financial advisers in passive investment strategies.

“Interest in passive investing in the UK has steadily grown over the last two decades and 2013 could be a watershed moment,” said Simon Pistell, managing director, Legal & General Investments.

Mr Pistell said the UK’s Retail Distribution Review (RDR) which ended commission payments to financial advisers at the start of this year had increased the pressure on IFAs to reduce portfolio costs and offer better value to their clients.

“It is a priority for us to expand the reach of our index funds among financial advisers this year,” said Mr Pistell, who also promised that L&G would be launching more new products.

Legal & General manages £243bn in index assets, making it one of the largest providers of index-tracking funds in the UK.

L&G’s index funds which provide exposure to UK, European, Japanese and Pacific equity markets along with index funds linked to the UK gilts and sovereign bond markets have had their annual management charges reduced from 20 basis points to 15bp.

A further four regional index funds providing exposure to emerging market equities, EM bonds, international equities and the 100 largest global companies have have had their annual management charges reduced from 30 basis points to 25bp.

The reductions in charges by Legal & General suggest that index fund managers have recognised the need to respond to the growing competitive threat posed by providers of exchange traded funds.

In December, State Street Global Advisors reduced fees on five of its UK index funds with assets of over £550m as part of its preparations for RDR.

Large ETF providers such as iShares and Vanguard have been stepping up their efforts to reach out to financial advisers to persuade them of the appeal of their products ahead of the implementation of RDR.

However, index funds are generally regarded as being slightly cheaper than ETFs.

The iShares FTSE 100 ETF carries a total expense ratio of 40bp, making it more expensive than the Legal & General’s flagship UK equity index fund which tracks the FTSE All-Share as well as its FTSE 100 tracker which both now have a management charge of just 15bp.

Peter Sleep, a senior portfolio manager at 7IM, who uses both ETFs and index trackers has pointed out that ETF managers in Europe have kept their charges too high, in contrast to the US where providers are fighting a cut-throat price war to win market share.

Mr Sleep says that buy-and-hold investors should consider index funds ahead of ETFs if they do not need to trade intra-day. Charges on index funds do vary widely between providers but the market is becoming more competitive as more managers bring out products, adds Mr Sleep.

In October, Lyxor announced fee cuts for seven of its largest ETFs while also dismissing any suggestions that it might spark a price war among ETF providers in Europe.

While other ETF managers chose not to respond to Lyxor’s initiative, investors must wait to see if they react to this resurgence in price competition from providers of traditional index funds such as Legal & General.

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