Money Down: Some platforms won’t remove money they say is too expensive
Investors are caught in the crosshairs of an industry battle over investment funds perceived to offer poor value for money.
While some investment platforms – the most popular way for consumers to manage DIY portfolios – are removing funds they say are overpriced and don’t meet minimum standards, others are refusing to do so.
They believe that investors should have the right to choose the funds they want, although they warn customers against funds with poor value.
Interactive Investor and Fidelity International are among those platforms cherry-picking funds they say do not offer value for money. They claim they have a duty to protect customers under new consumer rights rules set out by the regulator. AJ Bell and Hargreaves Lansdown do not screen funds.
Interactive Investor says it has excluded 66 mutual funds. Of these, 53 were traded by customers less than twice in the past year. In most cases, Interactive Investor was alerted to the poor value by the companies managing the funds.
A spokesperson said: ‘We feel comfortable in our interpretation of the rules. Ultimately, we are talking about a small number of investments with poor value.
‘Given the requirement under the Consumer Duty rules to ‘disable’ funds that do not deliver value for money, our move should focus the minds of fund management groups on delivering investor value.’
Customers who have investments in the blocked funds have been informed of the platform’s move – and that they can no longer invest in it.
Mike Barrett, of financial consultancy The Lang Cat, said: ‘This feels like positive action. The platforms have actually supported you as an investor.’
Fidelity is the only platform that publishes details of the funds it has blocked. This includes the listed investment funds MIGO Opportunities and RIT Capital Partners and investment funds Premier Miton Worldwide Opportunities and Argonaut European Alpha.
It reads: ‘All decisions we make are made with the best interests of our customers in mind.
‘We have a duty to be careful and responsible with the investments we make available.’
The group says it monitors investments offered on its platform to “ensure customers are protected from foreseeable harm.”
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 – the value for money and liquidity of the underlying investments.
Investors who have money in these rejected funds can still use Fidelity’s platform to sell their holdings or switch to other funds.
The new consumer protection rules came into force this 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 warn customers about this.
If platforms break the rules, they can be fined. The FCA says of investment platforms that they ‘play an important role in bringing products to market and must therefore ensure that their or other costs in the chain do not cumulatively result in the product no longer offering fair value’.
This means that the combined investment platform fee and management fees charged 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’: if an asset manager says one of its funds no longer provides clear value, the platform must remove it. That is only in extreme cases, but platforms cannot sit back and relax.’
Holly Mackay of investment website Boring Money believes investors should pay no more than 1.2 percent per year to hold a fund on a platform. This includes the platform fees, typically around 0.35 percent.
She says: ‘If you pay more, you have to ask yourself why. Sometimes there is an answer that makes it worth it – exceptional investment performance, for example.”
An example of a fund that has proven to be a winning investment despite its high costs is Fundsmith Equity.
This £23 billion fund is run by City veteran Terry Smith and has an annual contribution of up to 1.5 percent depending on the platform you buy it from. In terms of performance, the index has achieved annual returns of more than 15 percent since its launch in late 2010. The benchmark, the MSCI World Index, has generated an equivalent of 11.1 percent.
Mackay says: “Fundsmith Equity has been a best-selling fund for as long as I can remember. Investors know it’s expensive, but they say it’s worth it. The manager also communicates clearly what the fund is trying to do and how it wants to achieve that.’
Barrett says platforms have been fired in the past for failing to warn customers about the risks of popular funds.
Hargreaves Lansdown was heavily criticized for promoting investment fund Woodford Equity Income until the day it was suspended in 2019 after liquidity problems.
This £3.7 billion fund, managed by Neil Woodford, was marketed as an income source for investors from a portfolio of dividend-friendly companies. However, the assets were heavily invested in illiquid assets.
Barrett said: ‘There was a lot of frustration among investors who felt that Hargreaves Lansdown should have done more to warn them of the increasing risks of the fund’s portfolio.
But sometimes the costs are misleading
Funds that invest part of their assets in investment trusts are among those blocked by platforms on the basis of high fees. Their removal has sparked controversy because of the way these fees were calculated.
Funds holding investment trusts must now calculate their annual charges to include those charged 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 which was ‘flawed and misleadingly exaggerates costs’.
For example, Gravis UK Infrastructure Income is an £826m fund that invests in companies financing key infrastructure projects. This includes wind turbines at sea and solar energy parks.
Embedded in the investment objectives is a commitment to providing investors with ‘exposure to a vital sector for the UK economy’. Currently it produces an annual income equivalent to around 4.5 percent, 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 percent, the new disclosure requirements require them to show investors a ‘synthetic’ ongoing annual charge.
This represents a cost of 0.75 percent plus an average of the annual costs of the investment companies it has in its portfolio, such as Greencoat UK Wind and Bluefield Solar Income.
But the fund’s other ten holdings (e.g. National Grid) are not investment funds and are therefore ignored.
The result is that Gravis now states in its investor information that it has an ongoing annual charge of 1.65 percent – a figure that is hugely off-putting to all investors, investment platforms and asset managers.
The knock-on effects are enormous. Gravis could divest its mutual fund investments to reduce the fund’s synthetic annual costs – and make the fund more investor-friendly.
But since fund managers can get most of their infrastructure exposure through listed investment funds – this is for liquidity reasons – the Gravis fund would struggle to find replacement investments.
In the worst case, the country could give up the ghost and accept that it can no longer fulfill its investment mission.
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