Should there be a bonfire of the investment funds?
Even the most ardent defender of free market choice would have to admit that 2,830 open-ended funds, and counting, is a bewildering number for investors and their advisers to negotiate.
And this is just the number of UK-based unit trusts and Oeics listed on FE Trustnet. It does not include investment trusts, ETFs and any offshore funds, nor the panoply of insurance-based savings products to choose from.
Those of a cynical bent might suspect that this is less about giving consumers unfettered investment choice but more of a deliberate ploy to obfuscate and hide pedestrian fund performance.
If an investment house ran just a handful of funds – perhaps in an area in which they had particular expertise – then any extended period of underperformance is going to stick out like the proverbial sore thumb. Fidelity, for example, has 73 open-ended funds, so one or two (or 10) duds can easily slip under the radar.
Why does any investment house need this number of funds? The Investment Management Association lists 35 different sectors – meaning Fidelity has an average of at least two funds per sector.
Fidelity is not alone. M&G runs 51 opened-ended funds, Invesco Perpetual 44 and Swip 42. This would hardly be a problem if these were all stellar performers but they are not.
One advisory firm I spoke to said it recommends only 13 of M&G’s 51 funds. And this is one of the better investment houses. Not one of Swip’s array of funds make it onto its “buy” list.
The much-publicised “name and shame” lists, like Bestinvest’s Spot the Dog report, highlight the very worst performers. But there is a large rump of mediocre funds, delivering at best average returns but charging a premium compared with the charging structures on passive ETFs and trackers.
This problem is exacerbated by fund managers that seem obsessed with launching new funds. Last week, for example, we saw Jupiter Merlin launch an “extra cautious” fund of funds to compliment its cautious and balanced offerings.
Like many launches, this seems to be driven by the marketing departments of these firms rather than by process-led technical investment analysts spotting a genuine gap in the market. No doubt because it is easier to raise assets by selling new funds than developing decent track records on existing holdings.
At the same time, these companies are slow to cull underperforming funds – and why would they when apathetic consumers and lazy advisers ensure they keep collecting their annual management fees.
As the universe of funds keeps on expanding, we have the ridiculous situation where some fund managers offer almost identical funds. Even investment advisers admit it is hard to spot a meaningful difference between Invesco Perpetual’s Income and High Income fund, Fidelity’s Moneybuilder and Enhanced Income fund or M&G’s Corporate Bond and Strategic Corporate bond fund, to name but a few.
It remains to be seen whether this situation changes due to the RDR. On one hand, better disclosure of charges may put downward pressure on fees and could lead to more investors shifting assets from poorly-performing, high-charging funds. This could lead to managers amalgamating or closing funds that prove unprofitable.
Alternatively, fewer advisers may recommend switching – as once they do they will not be able to collect the trail commission from previous sales. So long as they do, nothing will continue to be paid, long after January 1.
I have always thought the best way to judge a company is how its treats it existing customers. Perhaps it is time the majority of advisers ask more penetrating questions about how fund managers serve the bulk of their investors.
Emma Simon is deputy personal finance editor at the Telegraph Media Group