What does the chart show?
It shows how much money you would have if you invested £500 two years ago in “medium risk” passive funds across a range of providers.
Many investors who want to purchase “ready-made” passive investment products find it difficult to understand what each offers and how much is charged in fees. Information on performance can be scant.
But what if you could try them all? Boring Money, the financial research company, ran an experiment in which it invested £500 into 19 investment providers on the same day in January 2018.
It chose ready-made “medium risk” passive funds that held a share of equities as close to 60 per cent as possible. Then it left them alone for two years.
“It’s the single question everyone has: how much did I give you and what is it worth today?” said Holly Mackay, founder of Boring Money.
Top performers in the experiment were AJ Bell Youinvest, MoneyFarm and Vanguard, which charged low fees of between 0.6 and 1.6 per cent over the period. The funds experienced growth of between 9.5 and 11 per cent, including fees.
Does size matter?
High-fee accounts were hit harder during the experiment, given the relatively small amount of money invested, compared with their low-fee rivals. While some providers underperform when dealing with small sums, the same providers did relatively better when it came to larger investment pots.
Barclays Smart Investor trailed the pack with a total of £434, after it charged approximately £106 in fees on a £500 account over two years. But on its fixed monthly fee structure, the fees spread across a much larger investment of, say, £50,000 would be a much smaller percentage of the total investment, at just 1.6 per cent.
Did the products change during the test period?
At the start, all the portfolios selected by Boring Money were, give or take a few percentage points, 60 per cent equities.
Two years on, this had changed dramatically for several providers. While Vanguard remained steady at 60 per cent equities, Hargreaves Lansdown had raised its equity exposure to 74 per cent while, for Charles Stanley Direct, it dropped to 44 per cent.
Ms Mackay said the exercise underlined how rapidly an investment product can move away from what a consumer thinks they are purchasing, as well as the considerable variance among providers in how they interpret a “medium risk” investment strategy.
“People assume that they’re largely similar from one provider to the next,” she said.
Why does this matter?
The Financial Conduct Authority, the UK financial regulator, published a report in March on the online platform market, slamming platform charges as “complex” and difficult to compare.
Investors lack the necessary data to be able to work out what returns they can expect from their money, said Ms Mackay. “If people are trying to compare like with like it can be almost impossible.”
Ready-made passive funds are increasingly popular not only with mainstream savers but more sophisticated investors looking to diversify their portfolios or those attracted by a set-and-forget investment ethos. In January, the amount invested in global passive funds surpassed $10tn.
“These solutions are growing,” says Ms Mackay. “And it’s not just the novice investor that is picking them.”