Passive price war hots up as competition rises


The passive fund management industry is seeing a new wave of cost cuts as competitiveness drives a price war across the market.

This week has seen several price cuts on a number passive tracker funds from leading providers, including BlackRock and Vanguard.

BlackRock slashed fees for five core funds in its Collective Investment Funds range as part of a regular review of charges and the “value proposition” of the funds.

The ongoing charge figure for the BlackRock 100 UK Equity Tracker Fund and the BlackRock UK Equity Tracker Fund was cut from 0.16 per cent to 0.07 per cent, while the BlackRock US Equity Tracker Fund and BlackRock North American Equity Tracker Fund saw a rate cut from 0.16 per cent to 0.08 per cent.

In addition, Vanguard will remove the dilution levy of 0.10 per cent on its entire Vanguard LifeStrategy fund range, which currently has more than £2bn in assets. The range, which uses Vanguard’s index funds and ETFs as components, will continue to have an ongoing charge of 0.24 per cent.

Hargreaves Landsdown head of passive investments Adam Laird says though passive funds charges can’t go “much lower” than current levels, they might possibly reach 0.03 per cent, which is the charge of the cheapest passive fund tracker offered in the US.

Although it depends on the market and asset class, if fees are lower than 0.09 per cent then the fund is “worth consideration”, says Laird.

However, some providers have a way to go to be competitive.

Laird says there are providers who are “simply sitting in their bunkers” and charging “way above” the going rate for their funds. Some providers charge over 1 per cent for the same type of funds that BlackRock cut its fees on, says Laird.

For example, the Alifax FTSE100 and Virgin FTSE All Share tracker funds both charge 1 per cent, while the Henderson UK tracker fund has ongoing fees of 0.78 per cent.

Laird says: “We haven’t seen much movement in these funds, but I hope that fees will be reduced as these funds cost investors over the odds.”

‘Not all about fees’

Cutting fund fees to remain competitive is not the only message providers want to send to advisers and investors.

Vanguard can keep costs low because of its “unique ownership structure in the US, under which we operate at-cost and return profits to investors in the form of lower expense ratios”, head of retail Nick Blake explains. “As our assets under management increase globally, we can continue to reduce expense ratios for the investors in our funds.”

At the moment, within Vanguard’s equity index funds, the cheapest product is the FTSE UK All Share Index Unit Trust, which charges 0.08 per cent. However, other funds such as the US Equity Index Fund or the FTSE Developed World ex-UK Equity Index Fund charge 0.10 per cent and 0.15 per cent, respectively.

Legal & General proposition manager of retail index funds Dan Attwood says index fund management is “really about scale”, rather than fees. “Fees are important factors, but we don’t think it is the only factor as the scale of the provider and the commitment to the market you are trading into are also key,” he says.

Making the cut

Since November 2014, Legal & General has “substantially” reduced ongoing charges up to 55 per cent across its retail index fund range, Attwood says. The largest cut was on the L&G International Index, now charging 0.14 per cent instead of 0.33 per cent.

From 1 June 2015, L&G also introduced a fund management fee of 0.10 per cent which will be used to pay the various costs of managing the fund.

The move was thought to “make it simpler for investors” and “reduce the risk of ongoing charges going up”, says Attwood.

Attwood says though the firm is committed to keeping fees at current levels, “we will continue reviewing those charges and ensure they keep adding value for investors”.

BlackRock ETFs provider iShares says it also has no plans to change the pricing of any of its ETFs in “the foreseeable future”.

There is still further ground to be gained in the passive price war, but these battles are “likely to rage on new fronts”, says Laird. “I believe that rather than seeing more price cuts on passive funds, you’ll see more of these cuts in other asset classes, such as emerging markets and bonds.”

Laird adds: “In spite of the price war, there is a lesson there for investors to start actively reviewing their funds and ask questions to the managers on the fees.”