View more on these topics

Working out if a fund is value for money

Recently regulatory changes have led to a much greater focus being placed on everything the end client pays. For asset managers, there has been a greater focus on a fund’s AMC and ongoing charges figure. This has helped passive funds gain significant inflows over the last couple of years and generally they are much cheaper than active funds.

At Square Mile we do not look at the fund’s OCF in isolation but whether the fund’s offering provides value for money. We are also of the belief that funds with both high and low OCF’s can represent value for money. Both a Primark t-shirt worth £2 and used for decorating and a £170 Dolce & Gabbana silk shirt used for special occasions can both represent value for money depending on the user.

When we first considered what is value for money we looked at every basis point spent on a fund and how much investors get back in return. We analysed all the funds in the IA UK All Companies sector over the last five years to see which funds provided the most bang for their buck.

This was done by dividing the fund’s annualised return to 30 November by its OCF. On this basis, the fund which represents the most value for money is the iShares UK Equity Index fund, as over the last five years for every basis point an investor has spent on the fund they would have received 159 basis points in return. Interestingly the top 14 funds were all passive funds. Investors should be aware that although they may get a larger return on each basis point spent by going passive, passive fund returns are limited by the market as they can never outperform the market net of fees over the long term. While you may get a lesser return for each basis spent by going active, active managers can outperform the market and therefore generate a higher return on an investment.

We then analysed active funds in the UK All Companies sector to see if investors were being rewarded for the extra costs they were paying compared to using a passive manager. For this we used the following formula:

If a given active fund has a positive figure then investors are being compensated with higher returns for the extra cost being paid. Of the 208 active UK Equity funds we considered, 149 (72 per cent) could provide a higher return than the passive fund and therefore investors were compensated for the higher OCF. It should be noted that this analysis included mid-cap funds and over the last five years to 30 November 2017 the FTSE 250 has outperformed the FTSE All Share. The table below shows the top 10 funds based on our analysis.

For every basis point that an investor pays for being invested in the Old Mutual UK Mid Cap fund above the L&G UK Index trust they received an extra 15.1 basis points in returns.

As you can see from the above table, based on the method we have mentioned the fund which provides the second best value for money is the Old Mutual UK Dynamic Equity fund which has an OCF of 1.1 per cent, higher than the sector median of 0.91 per cent. So, a fund with a relatively high OCF can still represent value for money.

There are a few downfalls in the above methodology. Firstly, it is only a snapshot in time, the funds in the table may have had a good five-year period to 30 November 2017, but if you had looked at the funds’ performance a month prior or in one month’s time, the performance may be totally different. An advancement of this method would be to look at rolling five-year periods.

Secondly, we have now moved, and rightly so, to a realisation that the highest returning fund is not always the best fund for a given investor. We should instead consider what the fund is trying to deliver to investors and whether it is providing good risk adjusted returns. Therefore, we made a slight adjustment to the above formula by using the fund’s Sharpe ratio, or the risk-adjusted return.

This led to the following top 10 funds:

The table shows that for every basis point an investor pays for being invested in the MFM Bowland fund compared to the L&G UK Index trust, the Sharpe ratio has increased by 0.012.

Tom Poulter is head of quantitative research at Square Mile



FCA chief: Brexit passporting rights need to be solved

FCA chief Andrew Bailey has urged policymakers to secure the future of long-term pensions and insurance contracts after Brexit by avoiding the ‘cliff-edge’ removal of passporting rights. Passporting rights are often needed to pay out on pensions and other contracts for expats or from firms with headquarters overseas. Treasury select committee chair Nicky Morgan and […]

'Feeling the Squeeze'

Royal London carried out a UK wide survey with 2,500 consumers age 35-44 over the summer. The survey found that over a third, 34 per cent, said their finances felt Squeezed and so were struggling to meet day-to-day expenses, despite 87 per cent being aware that they need to save more. However, the survey did […]


News and expert analysis straight to your inbox

Sign up


There is one comment at the moment, we would love to hear your opinion too.

  1. The big problem with this analysis is that the table will have completely different names on it in 5 years.

    Also, any effective comparison, should consider large cap against large cap, mid cap against mid cap etc. The UK All Companies sector is a pointless starting point for any comparison because it is too broad.

Leave a comment