How much will unit trust investors stand to lose by overpaying the managers of actively managed unit trusts through excessively high fees over the next 12 months?

According to the Trackerfunds.com latest study, this sum could be as high as £646 million for those investors in unit trusts which fall within the UK All Companies Category.

£646,455,720 to be exact – yes, nearly 2/3rds of a £billion.  A colossal sum of money thrown down the drain. And this is not just a ‘one-off’ sum. Private investors are wasting this EVERY YEAR.

Put this waste another way. Imagine £646 million was all spent on brand new Porsche 911 Carrera C4 coupés, a top of the range car which most active fund managers would like to be seen driving (and some probably do!). This would buy 9,235 cars, and if you parked them bumper to bumper, the line would stretch from Dover to Calais and still go 3 miles inland. Think of all those beautiful brand new company cars belonging to ‘fat-cat’ fund managers just rusting away in salt water!  And what’s worse - this waste happens every year, and the bill is growing year on year.

Numerous studies have shown that the majority of actively managed funds under-perform their benchmark Index consistently and that the major contributory factor is the high cost of fees the managers charge. This was borne out by a recent survey which showed that British fund managers were among the highest paid in the world.

Actively managed funds typically charge upfront fees of between 5% and 6% plus an annual charge of 1.5%. In contrast, most tracker schemes have no initial fees and often charge less than 0.5% a year.

Selecting a tracker fund with low fees is therefore one of the best ways for the average investor to maximise returns.

In this Waste Meter study we sought to establish how much UK based private investors in unit trusts could save by switching to tracker funds.

This has been based on the fees which will be paid to actively managed fund managers in 2002 calculated by reference to 305 unit trusts available to UK private investors which comprise the UK All Companies sector. There are altogether 20 official sectors within the UK Unit Trust Industry and the most popular is the UK All Companies sector accounting for 38% of the total value of assets invested. These assets are invested exclusively in UK companies. The value of the assets and the annual fees charged by these funds are taken both taken from an independent source: Standard & Poor’s Fund Services http://www.funds-sp.com.

We then assumed that the investors in these funds had invested in the five tracker funds with the lowest reported annual fees. The difference in cost is the amount of money recorded in our Waste Meter.

This selection ensured that we made fair comparisons between the universe of unit trusts and their equivalent tracker funds.

The study calculated that unit trust investors in this sector will pay 0.970195% more in annual fees on their actively managed funds than if they had invested in the average of the 5 most competitively priced tracker funds. All that these investors would be sacrificing was the chance of being invested in a fund that might beat the index. Previous studies have shown, however, that the odds of selecting such a fund were 1 in 5 in the first year and considerably less in the second and subsequent years.

The following were eliminated from the sample:

• any fund not open to new investors
• funds with an initial investment of £25,000 or more
• funds in operation for less than a year
• funds with assets of less than £25 million.

All UK tracker funds are as broadly diversified as actively managed funds. FTSE 100 tracker funds hold portfolios of 100 stocks on a fully replicated basis whereas FTSE All-Share tracker funds hold up to 200 stocks on a sampled or stratified basis.

What individual investors might conclude from this study will depend on the degree of certainty they have in selecting funds which beat the benchmark index consistently over a period of 5 years or more.

Empirical evidence both in the UK and America has been published in an effort to identify reliable strategies which achieve this objective. Furthermore, despite the views of investment analysts and investment professionals who earn their incomes from offering services which they claim can achieve consistently superior returns, no major study has ever shown that such strategies work.

Trackerfunds.com

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