Investment: Be ready now the CATs are out of the bag

ANY REGULAR reader of this column, temporarily vacated by Jonathan Davis this week, will have noticed, hopefully, his emphasis on a key fund management issue: delivering good value for investors' money.

By this term, he means not simply an emphasis on outstanding fund performance (any manager with a sense of pride in his or her work will strive to achieve this), but on that performance relative to the charges levied on the fund itself.

For Jonathan, the best "value" funds in recent years have tended to be trackers, which replicate in some form the performance of one of a range of share indices, be they in the UK or worldwide.

In recent years, the record of UK-linked trackers when compared with their more actively managed rivals speaks for itself. In the past three years, Gartmore's UK Index fund, an All-Share tracker, delivered growth of 67.2 per cent. This performance places it in 23rd place within the UK growth and income sector, which consists of 130 funds. Virgin Direct's tracker achieved near identical performance: pounds 6,000 invested in April 1996 would now be worth pounds 10,035.

Performance, however, is not the only criteria by which we can assess whether a fund delivers value. Closely linked to it is the cost of investing in the fund itself. Quite clearly, a unit trust with a bid/offer spread (the difference between buying and selling a fund) of 5 or even 6 per cent, plus annual management charges of 1.5 per cent, will have to deliver considerably better performance year after year than a fund that has no initial charges and levies only a 0.5 per cent management fee each year.

The evidence is that few active-fund managers succeed in delivering the kind of outperformance to justify the higher charges they levy. Indeed, some funds, facing a sharp rise in the value of Footsie company shares, have been forced to turn their funds virtually into "closet trackers".

According to a recent survey by Money Marketing, a specialist magazine aimed at financial advisers, some managers are buying shares in leading Footsie companies almost in the same proportion as trackers themselves.

For instance, the top 10 Footsie stocks at the beginning of March were BP Amoco, Glaxo Wellcome, British Telecom, Lloyds TSB, HSBC Holdings, SmithKline Beecham, Vodafone, Shell, Barclays and Diageo.

Taking three funds as an example - Fidelity's UK Growth, Hill Samuel British Unit Trust, and Henderson UK Capital Growth funds - all held shares in between seven and 10 of these top 10 Footsie companies, in roughly the same proportions as their weighting in the index.

The position on charges has become even more complicated by the Treasury's attempts to ensure that investors in the new Individual Savings Account (ISA), the tax-free wrapper that replaced PEPs last week, should operate some form of benchmark system.

CATmarks (the initials stand for low Charges, easy Access and fair Terms) are its preferred solution. Essentially, any company that aims to claim a CATmark for its investment fund must charge no more than 1 per cent in annual management fees, while the minimum investment should be no more than pounds 50 a month or pounds 500 for lump sums.

Fund management companies have led a powerful rearguard action against CATmarks. They argue that more naive savers will be led to believe that the use of a CAT standard means the fund itself carries some sort of government seal of approval.

Second, and linked to the above, it is argued that by demanding such a low initial charge (instead of a more typical 5 per cent fee), a CATmark bars independent financial advisers (IFAs) from offering proper advice to savers.

This is a powerful argument, which the Government has tried to counter by suggesting that IFAs should be prepared to operate on a fee-paid basis when giving advice on equity-linked ISAs. But clearly, many clients, used to the notion that their IFA is somehow magically able to recommend products without them ever having to pay hard cash for his advice, are likely to balk at paying pounds 200 or more for the privilege.

Even so, the fund management industry's strictures on the need for proper advice would have had more validity were it not for the sight of investors queuing over the Easter bank holiday, all aiming to beat the 5 April deadline for last-minute PEPs. As many interviews revealed at the time, many had no idea what they were doing or of the tax-effectiveness of PEPs relative to their financial needs.

Bureaucratic they may be, and set at slightly too low a level for fund managers' comfort. Even so, CATmarks still offer the potential for investors to tell whether the contracts they are entering into offer fair charges on their money.

Barely a handful of ISA providers have chosen to offer CATmarked funds. Those that have agreed met this week to devise a common logo.

It is too soon to say whether this will raise the profile of CATmarked funds and prompt other providers to offer similar ones. Perhaps the only way this will happen will be if it becomes clear that investors are seeking out funds with low entry costs and decent performance.

Even if CATmarks are not the magic answer to investors' prayers, at least they raise questions about what we pay fund managers to look after our money - and what we get back in return. In the case of many pooled fund investments, the answer is: not much.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Software Development Manager

£40000 - £50000 per annum: Recruitment Genius: This is an exciting opportunity...

Ashdown Group: Product Manager - (Product Marketing, Financial Services)

£30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

Recruitment Genius: Compliance Assistant

£13000 per annum: Recruitment Genius: This Pension Specialist was established ...

Ashdown Group: Market Research Executive

£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

Day In a Page

As in 1942, Germany must show restraint over Greece

As in 1942, Germany must show restraint over Greece

Mussolini tried to warn his ally of the danger of bringing the country to its knees. So should we, says Patrick Cockburn
Britain's widening poverty gap should be causing outrage at the start of the election campaign

The short stroll that should be our walk of shame

Courting the global elite has failed to benefit Britain, as the vast disparity in wealth on display in the capital shows
Homeless Veterans appeal: The rise of the working poor: when having a job cannot prevent poverty

Homeless Veterans appeal

The rise of the working poor: when having a job cannot prevent poverty
Prince Charles the saviour of the nation? A new book highlights concerns about how political he will be when he eventually becomes king

Prince Charles the saviour of the nation?

A new book highlights concerns about how political he will be when he eventually becomes king
How books can defeat Isis: Patrick Cockburn was able to update his agenda-setting 'The Rise of Islamic State' while under attack in Baghdad

How books can defeat Isis

Patrick Cockburn was able to update his agenda-setting 'The Rise of Islamic State' while under attack in Baghdad
Judith Hackitt: The myths of elf 'n' safety

Judith Hackitt: The myths of elf 'n' safety

She may be in charge of minimising our risks of injury, but the chair of the Health and Safety Executive still wants children to be able to hurt themselves
The open loathing between Barack Obama and Benjamin Netanyahu just got worse

The open loathing between Obama and Netanyahu just got worse

The Israeli PM's relationship with the Obama has always been chilly, but going over the President's head on Iran will do him no favours, says Rupert Cornwell
French chefs get 'le huff' as nation slips down global cuisine rankings

French chefs get 'le huff' as nation slips down global cuisine rankings

Fury at British best restaurants survey sees French magazine produce a rival list
Star choreographer Matthew Bourne gives young carers a chance to perform at Sadler's Wells

Young carers to make dance debut

What happened when superstar choreographer Matthew Bourne encouraged 27 teenage carers to think about themselves for once?
Design Council's 70th anniversary: Four of the most intriguing prototypes from Ones to Watch

Design Council's 70th anniversary

Four of the most intriguing prototypes from Ones to Watch
Dame Harriet Walter: The actress on learning what it is to age, plastic surgery, and her unease at being honoured by the establishment

Dame Harriet Walter interview

The actress on learning what it is to age, plastic surgery, and her unease at being honoured by the establishment
Art should not be a slave to the ideas driving it

Art should not be a slave to the ideas driving it

Critics of Tom Stoppard's new play seem to agree that cerebral can never trump character, says DJ Taylor
Bill Granger recipes: Our chef's winter salads will make you feel energised through February

Bill Granger's winter salads

Salads aren't just a bit on the side, says our chef - their crunch, colour and natural goodness are perfect for a midwinter pick-me-up
England vs Wales: Cool head George Ford ready to put out dragon fire

George Ford: Cool head ready to put out dragon fire

No 10’s calmness under pressure will be key for England in Cardiff
Michael Calvin: Time for Old Firm to put aside bigotry and forge new links

Michael Calvin's Last Word

Time for Old Firm to put aside bigotry and forge new links