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Why are Fund Fees So Confusing?

Now approaching her 50s, Emily Reeve wants to boost the value of her pension pot. As a freelance marketing assistant, she has found herself with less paid work and more time on her hands over the past year and has taken the opportunity to review her finances.


(Morningstar) “I have come to the conclusion that I need to make more serious investments into my pension if I am ever going to be able to retire,” she says.

Since going freelance 10 years ago, Emily has made small monthly contributions into a pension and also has two stocks and shares Isas. In reviewing these accounts she found the returns she had achieved on each were very different and decided that she wants to invest more and take more risk in a bid to boost her returns.

She adds: “I am aware that both of my children are likely to go to university in the next few years and this is likely to be a drain on my income, which might limit what I can save, so I need my investments to be generating a reasonable return.”

My Tracker Fund has Disappointed

Emily, who lives in Kent, is particularly disappointed with the performance of an Isa she took out with Legal & General in the early 2000s. She says: “This was a tracker fund and at the time, it seemed to offer some of the most competitive fees. I split my money between L&G’s UK FTSE All-Share tracker and a European tracker.”

Initially, she made regular monthly deposits into the account but stopped these when she went on maternity leave in 2005 and did not reinstate them. Emily had hoped the money would continue to grow into a nest-egg for the future but says performance has been “pretty flat”. She says: “A couple of years ago it was worth just over £15,000 and today it is worth £16,000. It doesn’t seem to be a particularly impressive return.” Emily has since taken out another Isa with Charles Stanley Direct and is considering moving her money over from the L&G account, but is unsure of whether there would be a cost to doing so.

“I’ve looked on the website but I find it difficult to understand the fees. It looks as though the tracker fund charges around 0.5%, which seems quite high for a passive investment but there aren’t any additional platform fees to pay,” says Emily. “I invest in a few passive funds through Charles Stanley, which are certainly cheaper, but then there’s the Charles Stanley fee to pay on top. It is all quite confusing.”

Her investments through Charles Stanley have at least performed better. Holdings include Vanguard Emerging Markets Stock Index fund, and HSBC American Index. The Vanguard tracker has a three star rating from Morningstar, with a low and “relatively competitive fee”. However Morningstar analysts also note that it has a “mixed performance record versus peers and ongoing and significant country-concentration risks limits the fund Morningstar Analyst Rating to Bronze.”

More recently, Emily has invested in Fidelity China Focus Fund, an actively managed fund with a two-star rating from Morningstar. Analysts say the fund “continues to benefit from a capable portfolio manager and a consistently applied investment approach". This fund has produced a return of 22.43% over the past year for Emily, but fell 13.49% in the previous 12 months.

Risky Funds have Reaped Rewards

Overall, Emily's Isa with Charles Stanley has grown from around £5,000 to almost £28,000 in just a couple of years. She has been adding £500 a month to her account over that time.

Her pension, which she holds through Nutmeg, is invested in a ready-made risk-rated portfolio, meaning Emily has less say in the underlying investments but knows there is exposure to higher-risk areas such as emerging markets. She says: “It seems that where I’ve taken a bit more risk with my money I have done a lot better."

With a view to taking more risk, Emily has reduced her holdings in large UK blue-chips and instead wants to invest in more tech funds. She has been watching the iShares Automation & Robotics ETF (RBOT) and actively managed Polar Capital Technology Trust (PCT), and is considering investing in one or both of them.

She adds: "I am expecting to work for around another 20 years and I feel that over this timeframe, I can afford to take a bit more risk with my money. It strikes me that much of the growth in future years is likely to come from new technologies and emerging markets.”

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