COMMENT
Let The Tracker Wars Begin!

By Cliff D'Arcy
September 19, 2005

Here at the Motley Fool, we love low-cost ways to invest in the stock market, because, generally speaking, lower costs mean higher returns for investors. Hence, we're delighted that the world's largest fund manager today announced that it is drastically reducing the annual management charge (AMC) on its UK index-tracking fund.

Fidelity International has reduced the AMC on its £277 million MoneyBuilder UK Index Fund from 0.5% to a market-beating 0.1%. Adding in other annual expenses of 0.2% gives a total expense ratio (TER) for this fund of 0.3% a year, making it the cheapest index tracker around. In other words, the annual charge for an investment of £10,000 would be just £30, compared to the £150+ charged by a typical managed fund.

UK tracker funds are worth £12.3 billion, but about two-fifths of this money - £4.6 billion - is in high-charging tracker funds. Hence, Fidelity reckons that tracker investors could save £55million a year by switching to its low-cost fund. Here's how Fidelity's fund stacks up against its eleven biggest rival funds (plus well-known provider Direct Line and iFTSE 100 shares), the majority of which are hugely overcharging tracker investors:

The UK's largest index trackers (sorted by TER)
Fund	Fund size (£m)	Index tracked	Annual management charge (%)	Total expense ratio (%)
Fidelity MoneyBuilder UK Index	277	FTSE All-Share	0.10	0.30
F&C FTSE All-Share Tracker	454	FTSE All-Share	0.30	0.35
iFTSE 100 shares (learn more about these here)	868	FTSE 100		0.40
M&G Index Tracker	318	FTSE All-Share	0.30	0.49
Legal & General UK Index Trust Apply via the Fool	3,179	FTSE All-Share	0.50	0.52
HSBC FTSE All-Share Tracker	759	FTSE All-Share	0.50	0.52
Gartmore UK Index	450	FTSE All-Share	0.50	0.76
Norwich UK Index Tracking	412	FTSE All-Share	0.90	0.90
Scottish Widows UK Tracker	481	FTSE 100	0.50	1.00
Virgin Money UK Index Tracking Trust	2,008	FTSE All-Share	1.00	1.00
Direct Line FTSE 100 Tracker	107	FTSE 100	1.00	1.00
Nationwide Tracker	595	FTSE All-Share	1.00	1.00
Marks & Spencer UK 100 Cos.	288	FTSE 100	1.00	1.00
HSBC FTSE 100 Index	479	FTSE 100	1.00	1.02

Investors in the more expensive funds are clearly paying well over the odds for similar returns, and should consider switching to a cheaper tracker. However, switching may generate a tax bill if your tracker investments aren't held inside tax-free shelters such as PEPs or ISAs, so do check before jumping ship.

Even worse are the following fiendish funds, which charge high TERs and, amazingly, even have the cheek to charge initial (upfront) fees to tracker investors. Unbelievable!

The UK's most expensive index trackers (sorted by initial charge)
Fund	Fund size (£m)	Index tracked	Initial charge (%)	Annual management charge (%)	Total expense ratio (%)
Eagle Star UK Index Tracker	65	FTSE All-Share	5.50	1.00	1.17
Scottish Mutual UK All-Share Index	153	FTSE All-Share	5.25	1.00	TBC
Clerical Medical FTSE 100 Tracker	19	FTSE 100	3.50	0.75	1.13
St James's Place Tracker	21	FTSE All-Share	3.75	1.45	1.51
Credit Suisse FTSE 100 Tracker	19	FTSE 100	3.25	1.00	1.00
Legal & General (A&L) UK 100 Index Tracker	51	FTSE 100	3.00	1.00	1.46
Sovereign FTSE 100	19	FTSE 100	2.50	1.00	1.32

By creating the UK's cheapest tracker fund, Fidelity has thrown down the gauntlet to its competitors, many of which are looting tracker investors by over-charging for what should be simple, flexible, low-cost funds. Let's hope that UK tracker charges move in the direction that they have been going in the US, where last year's price war saw Fidelity and another leading manager reduce their charges to 0.1% a year or less.

With any luck, other fund managers will follow Fidelity's lead and tracker investors will benefit from a price war. It may even encourage cautious investors to dip a toe into the stock market, which would be another plus!

More: Invest in the UK's largest index tracker here | The Perfect Investment.

Cliff owns iFTSE 100 shares, invests in a FTSE 100 tracker, and owns shares in HBOS, parent company of Clerical Medical.