More passive fund providers are likely to cut fees to remain competitive after L&G knocked up to 25 per cent off its annual management charges, although the market’s cheapest offerings are not expected to go down any further.
L&G yesterday reduced the AMCs on its tracker fund ranges by five basis points. The firm’s single country and regional index funds, which include the £4.2bn Legal & General UK Index Trust, have seen fees lowered from 0.2 per cent to 0.15 per cent, while fees on the core global index range have moved from 0.3 to 0.25 per cent.
AWD Chase de Vere head of communications Patrick Connolly says: “This has put L&G at the more competitive end of the market, more broadly aligned with the likes of HSBC and Vanguard.
“As far as we are concerned, it is at the top end of the market – competitive prices accompanied by a strong track record in managing passive investments. This is a sensible step for L&G.”
L&G says the shift to fee-based advice under the RDR could see a further increase in demand for passives from advisers and says 2013 could be a “watershed moment” for the vehicles.
Connolly says: “We have expected and continue to expect greater interest in passive investments. We are now starting to see providers realising their propositions have to be competitive if they want a significant share of that market.”
Bestinvest managing director for business development and communications Jason Hollands says L&G’s move is a “further skirmish in the index fund price war we are seeing” in the passive space.
“Interest in passive investments has grown among advisers following the introduction of the RDR and in some cases there has been an almost ‘Road to Damascus-like’ conversion in favour of using them,” Hollands says.
“For those components of a portfolio where it is appropriate to use a passive fund, costs are going to be the single biggest factor in differentiating between index funds, so in this respect the ongoing price war is good news for investors.”
Chelsea Financial Services managing director Darius McDermott agrees L&G’s move makes sense and expects further fee reductions from some parts of the market. However, those already at the cheaper end of the passive market will be unlikely to cut further.
“It is inevitable that trackers which appear expensive will do this,” he comments. “Might some of the more expensive providers move towards that bottom base of charging? Yes, they probably will if they want to remain competitive.
“There are still some legacy tracker funds that are expensive but I don’t see that bottom mark of 10 to 15 basis points getting much cheaper.”