Is your DIY investor website dumping high-cost funds?

Money down the drain: Some platforms will not remove funds they say are too expensive

Investors are caught in the crosshairs of an industry battle over investment funds deemed to represent poor value for money. 

While some investment platforms – the most popular way for consumers to run DIY portfolios – are removing funds that they say are too expensive and do not meet minimum standards, others refuse to do so. 

They believe investors should have the right to choose whatever funds they want, although they are warning customers about poor value funds.

Interactive Investor and Fidelity International are among those platforms sifting out funds that they say do not offer value for money. They argue they have a duty to protect customers under new Consumer Duty rules laid down by the regulator. AJ Bell and Hargreaves Lansdown do not screen out funds.

Interactive Investor says it has barred 66 investment funds. Of these, 53 were traded less than twice by customers in the past year. In most cases, Interactive Investor was alerted to their poor value by the companies running the funds.

A spokesman says: ‘We are comfortable in our interpretation of the rules. Ultimately, we are talking about a small number of poor value investments.

‘Given the requirement under Consumer Duty rules to ‘switch off’ funds which do not represent value for money, our move should focus the minds of fund management groups on delivering investor value.’

Customers who have investments in the barred funds have been told about the platform’s move – and that they can no longer invest more into them.

Mike Barrett, of financial consultancy The Lang Cat, says: ‘This feels like positive action. The platforms have effectively got your back as an investor.’

Fidelity is the only platform to publish details of the funds it has barred. They include stock market-listed investment trusts MIGO Opportunities and RIT Capital Partners and investment funds Premier Miton Worldwide Opportunities and Argonaut European Alpha.

It says: ‘All decisions we make are with our customers’ best interests in mind.

‘We have obligations to be careful and responsible about the investments we make available.’

The group says it monitors the investments offered on its platform to ‘ensure customers are protected from any foreseeable harms’.

When carrying out checks on funds, Fidelity says it takes into account several factors – regulatory considerations, the financial strength of the fund provider and – at fund level – value for money and the liquidity of the underlying investments.

Investors who have money in these rejected funds can still use Fidelity’s platform to sell their holding or to switch to other funds.

The new consumer protection rules came into force over the summer.

Introduced by the Financial Conduct Authority (FCA), they specifically require platforms to identify funds or investment trusts that do not offer ‘fair value’ – and to warn customers about them.

If platforms break the rules, they can be fined. The FCA says of investment platforms that they ‘have an important role in products getting to market and so must ensure that their or other charges across the chain do not cumulatively result in the product ceasing to provide fair value’.

This means that the combined fee of the investment platform and the management charge levied on an individual fund should not be so high that the fund no longer represents a good investment. The Lang Cat’s Barrett says: ‘The Consumer Duty rules are ‘very explicit’ that if an asset manager says one of its funds no longer provides clear value then the platform has to remove it. This is only in extreme cases, but platforms can’t just sit back.’

Holly Mackay of investment website Boring Money believes investors should not be paying more than 1.2 per cent a year to hold a fund on a platform. This includes the platform charge, typically around 0.35 per cent.

She says: ‘If you are paying more, you should question why. Sometimes there is an answer that makes it worthwhile – for example, exceptional investment performance.’

One example of a fund that has proved a winning investment despite high charges is Fundsmith Equity.

Run by City veteran Terry Smith, this £23 billion fund has an annual charge of up to 1.5 per cent, depending on the platform you purchase it on. In terms of performance, it has produced an annual return of more than 15 per cent since launch in late 2010. Its benchmark, the MSCI World Index, has generated an equivalent 11.1 per cent.

Mackay says: ‘Fundsmith Equity has been a top selling fund for as long as I can remember. Investors know it is expensive, but they say it’s worth it. The manager also communicates clearly on what the fund is trying to do and how it will achieve it.’

Barrett says platforms have been burnt in the past for failing to warn customers about the risks of popular funds.

Hargreaves Lansdown was heavily criticised for promoting investment fund Woodford Equity Income right up until the day it was suspended in 2019 after hitting liquidity problems.

This £3.7 billion fund, managed by Neil Woodford, was marketed as a provider of income for investors from a portfolio of dividend-friendly companies. However, its assets were heavily invested in illiquid assets.

Barrett says: ‘There was a lot of frustration from investors who thought Hargreaves Lansdown should have done more to alert them to the rising riskiness of the fund’s portfolio.

But sometimes fees are misleading

Funds that invest some of their assets in investment trusts are among those to have been blocked by platforms on the basis of high charges. Their removal has stirred controversy because of the way these fees have been calculated.

Funds that hold investment trusts must now calculate their annual charges so they include those levied by the trusts they hold in their portfolio. This makes them look expensive.

Earlier this month, Baroness Bowles of Berkhamsted told this newspaper that this requirement was based on regulatory guidance that was ‘flawed and exaggerates costs in a misleading way’.

For example, Gravis UK Infrastructure Income is a £826 million fund that invests in companies financing key infrastructure projects. These include on and offshore wind turbines and solar energy farms.

Embedded in its investment objectives is a commitment to offering investors ‘exposure to a vital sector for the UK’s economy’. It currently delivers an annual income equivalent to about 4.5 per cent, paid quarterly – not as attractive as it once was when interest rates in the wider economy were lower.

Although the fund’s managers cap ongoing annual charges at 0.75 per cent, the new disclosure requirements require them to show investors a ‘synthetic’ ongoing annual charge.

This accounts for the 0.75 per cent charge plus an average of the annual charges of the investment companies it holds in its portfolio – the likes of Greencoat UK Wind and Bluefield Solar Income.

But the fund’s other ten stakes (for example, National Grid) are not investment trusts, so are excluded from the calculations.

The result is that Gravis now shows in its investor information as having an ongoing annual charge of 1.65 per cent – a figure that is hugely off-putting to all investors, investment platforms and wealth managers.

The knock-on effects are huge. Gravis could divest itself of its investment trust holdings to reduce its fund’s synthetic annual charge – and make the fund more investor-friendly.

But given most of the exposure that fund managers can get to infrastructure is through stock market-listed investment trusts – this is for liquidity reasons – the Gravis fund would struggle to find replacement investments.

In a worst case scenario, it could give up the ghost, accepting it can no longer fulfil its investment remit.

This post first appeared on Dailymail.co.uk