The Government is going to have to learn that it might be able to dictate charging standards but it ...
The Government is going to have to learn that it might be able to dictate charging standards but it cannot dictate returns to investors.
If it wants an insight into how stakeholder might work out it could do worse than to take a look at its proto-stakeholder effort: the Cat standard.
During rising markets the difference between 15% returns and 18% returns seemed negligible to investors. That period now seems well and truly behind us. Today the difference between a return of 5% and 8% is more than noticeable, especially as in many sectors the smaller spread is balanced between negative returns and slight positive ones.
With up front charges of up to 6% in some cases, plus 1.5% annual, and outperformance depending on only a few basis points, low charges would appear to be a big positive for fund performance. If you thought that you would be wrong.
A quick glance at the three year performance of Cat standard funds after charges does not suggest a 1% world is necessarily a higher return world.
According to Standard & Poor's data there are some 65 Cat standard funds in the unit trust/Oeic universe, only nine of which are amid the top 50% of the universe in terms of performance. At least the low charges have transformed some abysmal performance into the mediocre.
In looking at the performance of the entire UK unit trust/Oeic industry over the three years to July, the first Cat standard fund is ranked 101 out of 1437 funds ' the actively managed Norwich UK Growth portfolio.
From the Norwich European fund ranked at 105, the next highest rated Cat standard fund falls lower and lower starting at 347 and dropping steadily to 812 and that only includes 12 funds, a cluster of fixed interest funds, index trackers, income portfolios and one North America fund.
As the performance of the two Norwich Union funds shows, it would be unfair to equate all low charges with low performance. However, there is nothing to suggest low charges give good performance either.
In fact the Cat standard looks as if it has given worse value for money than funds with higher fees on a three year basis. This is an issue because most people's concern with an investment is what they are able to take out at the end.
If the Government wants to encourage savings and investment it should not be playing around with caps on fees, it should be looking at how to get consumers to invest enough for long enough to make a difference.
Partner Insight: For Blackfinch, the arrival of its IHT portfolio services was a 'natural evolution' in the group's offering and points to an established track record of returning cash to investors.
Senior Managers Regime
Interest rate outlook unchaged
FCA made demands last week