The US fund group Vanguard is coming to the UK. Its cheap index trackers could lead to a long overdue shake up for our investment industry.
When share prices were rising at 20% a year, few people worried that UK investment funds typically charged 5% upfront and 1.5% a year. Now that we’ve had a decade of flat returns, investors are looking at fund charges much more closely. With no growth, every £100 invested shrinks to just £81.67 over the course of 10 years.
The low cost of index trackers is one of the main reasons that they have remained popular despite the struggling stock market. The cheapest UK trackers charge between 0.27% and 0.51% a year but earlier this month came an announcement that could mean they’re set to become even better value for money.
Vanguard comes to the UK
Vanguard, the US fund group which manages almost £700b of investors’ money, announced earlier this month that it will be launching a range of funds in the UK. The company was founded by John Bogle and it launched the world’s first index tracker in 1976.
Its flagship fund is the Vanguard 500, which follows the S&P 500 index (one of the main measures of the US stock market). This fund currently has $75b invested, making it over 17 times larger than the most popular UK index tracker.
It has also returned an average of 9.7% a year since 31 August 1976. Yes folks, shares can go up as well as sideways, down and plummet in a sickening fashion. This figure is even more impressive when you consider that this fund has lost almost 3% a year over the last decade.
The annual charge on this fund is just 0.15% a year. So, with no growth over a decade, every £100 invested would become £98.51. Vanguard has a range of managed funds too, and the charges on these are also very low with some coming in at just 0.25%. These are Foolish funds indeed.
A fee war beckons
We’re not sure when Vanguard will be launching its UK range but it looks like it will be offering some index trackers, equity income funds, bond funds and a range of international funds. In other words, there should be something for more or less everyone.
Getting hold of these funds may be a little tricky. Vanguard doesn’t pay commission to advisers so it’s mainly going to be talking to fee-based advisers, who are a distinct minority here in the UK. It’s also not known for splashing out serious cash on advertising either.
Still, this move should have a positive impact on the fee levels of UK funds. Other index trackers are likely to follow suit although I’m not convinced the fees charged on managed funds will come down for a while.
As long-terms fans of index-tracking investment, here at the Fool we think this is excellent news and we await Vanguard’s next move with interest.
Learn more and invest in index tracking funds through the Fool.
