Page 46 - DIY INVESTOR MAGAZINE - NOVEMBER 2018
P. 46

 ACTIVE VS PASSIVE: AS THE COST OF ACTIVELY MANAGED FUNDS FALLS, PASSIVES CONTINUE TO GROW
Report shows active fees have reduced by 20%, but ETFs and trackers continue to take market share – by Graeme Brooke
An investigation into the effect of the government’s Retail Distribution Review (RDR) by financial data provider Morningstar found it has significantly driven down the cost of actively managed fund costs, but that investors are increasingly turning to ETFs and passive index trackers.
Introduced five years ago, RDR prevented fund companies from incentivising advisers to sell their products by paying commissions; instead, advisers had to have an up-front and transparent agreement with each client detailing the cost of their financial advice and all other fees.
The removal of commission payments led to the creation of new variants of existing funds, commonly referred
to as ‘clean’ share classes- the cost of owning a fund without any ‘hidden’ fees and charges.
Generally RDR has had a positive influence; DIY investors are now much better able to make apples and apples comparisons of funds, and the cost of ownership has reduced.
However, this new transparency not only allows investors to compare the performance of funds within a particular sector or peer group, but also to weigh the value of active management.
The report found that investors have increasingly turned to passively managed funds, on the view that not all actively managed funds justify their fees, and advisers are increasingly using passives that they may previously have avoided because they paid low or no commission.
DIY INVESTORS ARE NOW MUCH BETTER ABLE TO MAKE APPLES AND APPLES COMPARISONS OF FUNDS, AND GENERALLY THE COST OF OWNERSHIP HAS REDUCED
THE FALLING COST OF ACTIVE MANAGEMENT
Morningstar identified that since 2013 the average fee for actively managed equity funds has fallen by 18%; almost all new money inflows have been into cheaper clean share classes and there has also been fee compression within clean share classes.
Competition has increased between fund providers, and investors have discriminated in terms of price and switched assets from expensive share classes to cheaper ones.
Large-cap actively managed equity funds have delivered some of the biggest savings for investors; funds in both the US and UK have seen an average 20% reduction in fees since RDR when looking at clean and bundled share classes combined.
FUNDS IN BOTH THE US AND UK HAVE SEEN AN AVERAGE 20% REDUCTION IN FEES SINCE RDR
A UK DIY investor is likely to have a significant allocation of these funds in their portfolio —UK for the home
bias and US because it is the largest global economic superpower.
However, whilst the fee reductions Morningstar identified in active strategies are significant, those offered by passives were even greater; from an already low base, passive funds reduced their fees by 30% in the UK large-cap equity category, 32% in the Japan large-cap equity category, and by 34% in the European large-cap equity category.
Passive US large-cap equity funds have reduced fees by 50%, adding clamour to those that believe that keeping costs down is the key to successful investing; that is certainly compelling when viewed in the context of the record breaking bull run in recent years.
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