Word on the web: Fund shake-up

Vanguard’s recently announced move into the UK small investor market has caused a stir amongst the financial community
by Rosalie Starling

US investment giant Vanguard has rocked the UK financial services industry following an announcement that it would significantly lower the entry level for its funds. In an attempt to tap the “mass market of small retail investors”, the firm will offer minimum fund entry levels of just £500, while “monthly savings plans can be started for as low as £100”, writes Bill Jamieson for The Scotsman

While Vanguard has operated within the UK for around eight years, through index-tracking and exchange-traded funds (ETFs), availability was previously limited to financial advisers and wealth managers, with a minimum investment of £100,000. The new, drastically lower limit is set to shake things up in a market “where a swing has already been well under way from high-cost active managed funds to index-tracking funds, and ETFs where fees and charges are lower”, says Jamieson.

Even well established players such as Hargreaves Lansdown are feeling the impact. The company’s previously competitive Vantage platform, which provides a range of accounts with a total annual cost of approximately 1.1%, now appears comparatively expensive. According to Sean Hagerty, managing director of Vanguard Europe, the firm’s platform would charge an annual fee of 0.15% for the first £250,000 of an investment – the cheapest FTSE100 ETF has an ongoing charge figure of 0.06%, while the most expensive Global Emerging Markets fund is just 0.8%. As a result of the announcement, shares in Hargreaves Lansdown fell by up to 4.7% in the week beginning 15 May 2017, while other fund management firms including Jupiter, Schroders and Aberdeen also saw their shares sag. 

But it’s not all bad news for UK firms. As Vanguard lacks a platform for other funds and trusts, investors could be reluctant to move all their assets its way. 

The Scotsman article
A call to action In the UAE, the demand for low-cost mutual fund managers is high, with many calling for firms such as Vanguard to enter the region “to boost competition and drive down costs”, says The National’s Harvey Jones. UAE residents require cheaper and more flexible alternatives, with high-cost insurance-based investment plans being one of the only options for many. With the UAE’s limited choice of fund platforms, as well as higher average charges, the entry of a major low-cost platform would be extremely disruptive. 

Vanguard’s entry “would threaten the market’s high-cost, low-value players”, as well as raise awareness, says Steve Downey, a chartered financial analyst at Holborn Group in the UAE, who is quoted in the article. “There are already investment platforms available to UAE residents but they do not have a large presence and many investors still aren’t aware of these options.“

”More choice is definitely needed to challenge the status quo of opaque, inflexible, expensive and outdated savings products,” adds Sam Instone, chief executive of UAE-based adviser AES International.

However, while direct-to-consumer platforms – which could operate from outside or within the UAE – are showing great interest in the region, they would need to be approved by the Emirates Securities and Commodities Authority (SCA), notes Peter Hodgins, a partner at law firm Clyde & Co. The cost of registering with the SCA could potentially restrict the range of funds on offer through investment platforms.  

The National article
Money movements In the US, the increased availability of investment alternatives has also caused a stir, as more and more people move their money from actively managed mutual funds into passively managed, lower-expense exchange-traded funds, says Jeff Cox on Yahoo Finance. This has resulted in a record low in fees paid. 
The minimum fund entry level that Vanguard will offer to UK investors

According to data from Morningstar’s recently released US fund fee study, the asset-weighted average expense ratio across funds in the US fell to 0.57% in 2016, from 0.61% in 2015 and 0.65% in 2014. This fall stems directly from the demand for lower-cost funds, rather than a decrease in the price of the funds themselves – the top 2,000 funds reviewed in the study possessed an average expense ratio of 0.72%, which remained unchanged from the previous two years. The average active fund possessed a 0.75% expense ratio, says the study, while passive funds came out at 0.17%.

Overall, in 2016, passive funds attracted some $563bn from investors, compared to $325.6bn for active funds – although the flows have not been as varied this year, says Cox, “as about half of large-cap managers have been beating their benchmarks”.

Furthermore, the data reveals that investors have become much more selective when it comes to picking funds. From 2015 to 2016, Morningstar saw outflows of $627bn from the most expensive active funds, alongside an inflow of $41bn for the cheapest 20% of funds. 

The long-term impact of low-cost investment platforms remains to be seen, but whatever the outcome, investors must be shrewd in deciding where to put their assets. “All but the most experienced and sophisticated should still obtain professional financial advice,” says Clyde & Co’s Hodgins. 

Yahoo Finance article
Seen a blog, news story or discussion online that you think might interest CISI members? Email rosalie.starling@wardour.co.uk.
Published: 26 May 2017
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