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Mirror image is expensive and complex

by Sam Shaw

Mirror funds are too expensive and investors do not understand them, says Worldwide Financial Planning managing director Peter McGahan.

He says mirror funds trade off the reputations and performance of high-profile funds such as Fidelity special situations while delivering inferior returns than the fund would deliver if held direct.

He says the life fund version of portfolios such as Fidelity special situations also have different volatility profiles due to differences in taxation for life funds.

McGahan says consumers often think they are buying the underlying fund direct because product literature does not always make it clear that they are not. He argues that this could raise treating customers fairly issues.

He says: “A mirror fund is simply a version of the real fund but with a different charging structure which can be hidden inside the fund price, as opposed to the explicit charge on unit trusts, where you know what you are paying for. Moreover, the tax will have a big impact. Although the bond wrapper is positioned to be cheaper, the real charges are not exposed.”

But Norwich Union head of investment marketing Richard Kelsall says there are different types of mirror funds, with some funds just trying to replicate the investment objective of the named fund without investing in it.

He says: “Ours invest 100 per cent into the underlying fund so the returns should be identical. If anything, the returns would be paid out gross as opposed to net so that might be where the difference lies. If the charging structures were not explicit, this would not be treating customers fairly. This is not the case with NU.”

McGahan is also critical of advisers who opt for investment bonds for clients. He believes this is often a commission-driven decision and Isas and unwrapped investments could be a better option.

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