Personal Finance: Superdogs that stray fall foul to trackers

Virgin's `Premier League' is a match of active funds against passive, argues Iain Morse

VIRGIN DIRECT has just issued its annual "Premier League of Pep Superdogs," and it includes funds run by household names such as Standard Life, Friend's Provident and Equitable Life.

Superdogs are defined by Virgin as those funds under-performing average returns for their respective sectors over three consecutive three-year periods. In other words, says Virgin, these funds have managed to let Pep investors down - whether they invested at the beginning, in the middle or only recently.

As you might expect, Virgin recommends its own tracker "Growth Pep" as an alternative. But Gordon Maw, Virgin Direct's marketing manager, argues: "This is not just a marketing ploy. The real issue is that of active-versus-passive fund management. Our Pep is a tracker fund, passively managed to follow the FT-SE All Share Index - and we think it gives better value to most investors than an actively managed fund.

"Many of the claims made on behalf of active fund managers are just hokum. Investors pay high charges to buy into these funds, but few if any of the fund managers can do consistently better than a tracker fund following the All Share Index."

Not everyone agrees, however. Last year Virgin included two funds from Fidelity "Growth & Income" and "Income Plus" in their Superdog League - not long after Tom McCarron took over as head fund manager for both funds.

"I can only say I'm sorry if anyone switched on Virgin's recommendation," says Mr McCarron. "These funds had lagged, but since last year they've improved a very great deal. In fact, `Growth & Income' is now third in its sector, while `Income Plus' comes seventh."

Fidelity says both would have beaten Virgin's Tracker Pep over the last 12 months.

"The problem with tracker funds is that investors going into them over the last few years think they are risk-free," observes Mr McCarron, "but that simply isn't true. Trackers have no index risk - they move with a particular index of share values like that All-Share - but they do carry market risk.

"If a particular market, measured by an index on which a tracker is based, goes bearish or turbulent - that's to say, it stops just rising in value, but falls or can't decide - then these tracker funds will mimic this behaviour.

"At that point a lot of investors are going to realise just how risky a tracker fund can be."

Virgin is not the only Pep provider to use a past performance league table as a means of persuading Pep owners to switch their holdings. Best Investment has published an annual "Spot The Dog Guide" for several years.

Jason Hollands, a Best spokesman, sees trouble ahead for trackers and thinks that we should "aim to spot good teams of active fund managers who will do better than the market when things turn sour".

The real prize behind much of this aggressive marketing is the more than pounds 22bn that investors have locked up in existing Peps.

Remember, even when Peps are abolished on 5 April next year, and replaced by the Individual Savings Account (ISA), existing Peps will stay in force.

Pep rules allow an existing plan to be switched within the qualifying funds of a particular manager, or to be switched between different Pep providers without loss of the tax relief. The management charges levied on these funds alone make "switching" a lucrative battleground.

Anthony Yadgarof, who runs the Pep broker Allenbridge, argues: "All these scare tactics are aimed at getting you to transfer, either to a tracker Pep or to an alternative managed fund.

"Anyone tempted should be very careful of what all of this can cost, and whether they are receiving adequate financial advice in the process. Virgin's main interest is that you switch out of a Pep held in any one of several sectors - say UK Income & Growth, or UK Smaller Companies - into a tracker growth fund. In investment terms these are chalk and cheese."

Virgin is offering those who switch into their Growth Pep an inducement - "by paying the transfer penalty on behalf of the customer" - but in reality this is not worth much if anything to many tempted by their offer.

The real cost of making a Pep transfer lies in any "bid to offer spread" imposed on the Pep fund. This represents the difference between the price at which you buy units from a fund manager and the price at which they are redeemed by the manager if you encash your holding.

Most retail unit trust Peps carry a bid to offer spread of between 3 and 5 per cent. So if you are transferring a plan "worth", say, pounds 7,000, with a bid to offer spread of five per cent, the real cost amounts to pounds 350, with a net transfer value of pounds 6,650.

Start your day with The Independent, sign up for daily news emails
Kim Wilde began gardening in the 1990s when she moved to the countryside
peopleThe singer is leading an appeal for the charity Thrive, which uses the therapy of horticulture
Alexis Sanchez celebrates scoring a second for Arsenal against Reading
Life and Style
An easy-peel potato; Dave Hax has come up with an ingenious method in food preparation
voicesDave Hax's domestic tips are reminiscent of George Orwell's tea routine. The world might need revolution, but we like to sweat the small stuff, says DJ Taylor
Japan's population is projected to fall dramatically in the next 50 years (Wikimedia)
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

Ashdown Group: IT Manager / Development Manager - NW London - £58k + 15% bonus

£50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...

Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

£13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

Ashdown Group: Training Programme Manager - City, London

£40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...

Day In a Page

NHS struggling to monitor the safety and efficacy of its services outsourced to private providers

Who's monitoring the outsourced NHS services?

A report finds that private firms are not being properly assessed for their quality of care
Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

The Tory MP said he did not want to stand again unless his party's manifesto ruled out a third runway. But he's doing so. Watch this space
How do Greek voters feel about Syriza's backtracking on its anti-austerity pledge?

How do Greeks feel about Syriza?

Five voters from different backgrounds tell us what they expect from Syriza's charismatic leader Alexis Tsipras
From Iraq to Libya and Syria: The wars that come back to haunt us

The wars that come back to haunt us

David Cameron should not escape blame for his role in conflicts that are still raging, argues Patrick Cockburn
Sam Baker and Lauren Laverne: Too busy to surf? Head to The Pool

Too busy to surf? Head to The Pool

A new website is trying to declutter the internet to help busy women. Holly Williams meets the founders
Heston Blumenthal to cook up a spice odyssey for British astronaut manning the International Space Station

UK's Major Tum to blast off on a spice odyssey

Nothing but the best for British astronaut as chef Heston Blumenthal cooks up his rations
John Harrison's 'longitude' clock sets new record - 300 years on

‘Longitude’ clock sets new record - 300 years on

Greenwich horologists celebrate as it keeps to within a second of real time over a 100-day test
Fears in the US of being outgunned in the vital propaganda wars by Russia, China - and even Isis - have prompted a rethink on overseas broadcasters

Let the propaganda wars begin - again

'Accurate, objective, comprehensive': that was Voice of America's creed, but now its masters want it to promote US policy, reports Rupert Cornwell
Why Japan's incredible long-distance runners will never win the London Marathon

Japan's incredible long-distance runners

Every year, Japanese long-distance runners post some of the world's fastest times – yet, come next weekend, not a single elite competitor from the country will be at the London Marathon
Why does Tom Drury remain the greatest writer you've never heard of?

Tom Drury: The quiet American

His debut was considered one of the finest novels of the past 50 years, and he is every bit the equal of his contemporaries, Jonathan Franzen, Dave Eggers and David Foster Wallace
You should judge a person by how they peel a potato

You should judge a person by how they peel a potato

Dave Hax's domestic tips are reminiscent of George Orwell's tea routine. The world might need revolution, but we like to sweat the small stuff, says DJ Taylor
Beige is back: The drab car colours of the 1970s are proving popular again

Beige to the future

Flares and flounce are back on catwalks but a revival in ’70s car paintjobs was a stack-heeled step too far – until now
Bill Granger recipes: Our chef's dishes highlight the delicate essence of fresh cheeses

Bill Granger cooks with fresh cheeses

More delicate on the palate, milder, fresh cheeses can also be kinder to the waistline
Aston Villa vs Liverpool: 'This FA Cup run has been wonderful,' says veteran Shay Given

Shay Given: 'This FA Cup run has been wonderful'

The Villa keeper has been overlooked for a long time and has unhappy memories of the national stadium – but he is savouring his chance to play at Wembley
Timeless drama of Championship race in league of its own - Michael Calvin

Michael Calvin's Last Word

Timeless drama of Championship race in league of its own