Investor Views: “Active Funds Are Not Worth the Cost”
September 21, 2016
Business owner Malcolm Craven is switching his investment strategy, to focus on greener and more ethical options.
“I am mainly investing for retirement. But I’d also like to be building some funds to help pay my daughters’ university fees,” he adds. “But they are both teenagers now, so I’m aware I may have left this too late.”
Over the last decade, most of his pension and ISA savings have been passive tracker funds. But more recently Craven has started to consider the broader impact of his holdings.
“I have started to choke on the ethics – or rather lack of them – amongst many of the larger business that you end up investing in, via a tracker,” he said.
Craven is particularly infuriated by larger companies artificially lowering their tax bills. “I don’t want my money supporting that sort of thing,” he said.
“I have recently discovered a direct investment platform called Abundance Investment, where you can invest directly in renewable energy projects. This gives me a decent return on my money while doing something good for the planet and my kids’ future.”
If You Want to Grow Your Money: Invest
Craven started investing when he was working for an insurance company in the 1980s. “I took advantage of a great staff pension back in the 80s when I was working for what was then Norwich Union. Later, I invested in PEPs and then ISAs. Working in the financial services industry I was well aware that saving in a bank account is really only worthwhile for emergency rainy day funds. If you actually want to grow your money you need to invest.”
Craven built up a reasonable portfolio of tax-efficient savings alongside his pension.
“I liked the fact that ISAs offer modest tax breaks, but even better, you didn’t need to include this information on your tax return,” he said. “They are a hassle-free way to invest, with access to a large range of funds. I never had the time nor inclination needed to run a sensible share portfolio of my own.”
Going Passive to Reduce Costs
Later, Craven took stock of how much he was paying to invest in active funds – and instead opted for passive funds across his ISA and pension.
Initially, he said he invested in the Virgin Pension, where his money was invested in their All Share tracker fund. But after a few years he said he switched to a cheaper alternative.
“At the time Virgin was charging 1% for its tracker fund – which now looks expensive compared to active fund fees, let alone ETF charges,” he said.
Craven then switched to the Legal & General UK Index tracker which has an annual charge of just 0.06%.
Morningstar analysts give this tracker fund a three-star rating, and its managers have a coveted Silver Rating. This reflects their ability to replicate the chosen index accurately and cost-effectively.
Hortense Bioy, an analyst at Morningstar says: “This fund is a worthwhile investment proposition for those looking to gain broad exposure to the UK equity market.”
Compared with its peers in the UK large-cap blend equity Morningstar Category which includes both active and passive funds, this tracker has delivered consistent above-average returns over the long term, landing in the second quartile in 10 out of the last 12 calendar years to the end of 2015.
Pension Freedoms May Tempt Investors
Although Craven says both his pension and ISAs are mostly made up of passive investments, he sees them as quite different propositions. “Putting money into a pension was a deliberate choice to lock it away, safe from frittering. Until recently access obviously wasn’t an option,” he said.
He adds that while he welcomes the improved access to pensions, he is concerned that this will put temptation in the way of some investors.
He adds: “For example, I have ended up using all my PEP and ISA saving for purchasing property and the higher than expected costs of living once you have two kids.”
Using Property to Top-up Retirement Savings
Craven lives in rural Norfolk with his wife and two daughters.
“We have a lovely home which we will sell when the girls move out to go to University and when we downsize the money we save will top up our retirement funds,” he said.
“My advice to anyone on the subject of investing is keep it simple, but spend a bit of time learning the basics – the importance of investing as much as you can as soon as you can, spreading risk and avoiding high charges and hidden fees.”
Source: Morningstar. Emma Simon | 21/09/2016