Trackers cut costs for small investors

PEPS AND TESSAS Clare Arthur examines a new PEP product aiming to match the FT-SE 100 index
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The Independent Online
DIRECT LINE entered the battle this week to capture investors' PEP savings. The telephone-based company, better known for car and household insurance, is selling a FT-SE 100 tracker PEP that aims to match the share performance of the top 100 companies in the UK. Initially the company is making the PEP available only to some of its existing customers, with a full launch planned for later in the spring.

Trackers have taken principal position in the armouries of several fund management companies. Their low charges and achievable investment aims have made them relatively attractive. Unlike actively managed funds, which are run by a manager, tracker funds aim to copy the performance of a particular share index. The portfolio is designed by computer system to match that of the index it is tracking, from the FT-SE 100 to the Japanese Nikkei.

PEP funds that aim instead to beat a particular benchmark, called actively managed, can cost up to 5 per cent or more of the invested money to set up and as much as 1.5 per cent each year to run. By comparison the low running costs of tracker PEPs enable the more competitive funds to have no initial charge and annual management charges as low as 0.5 per cent.

Tracking an index might seem a boring and undemanding investment aim but in fact the vast majority of actively managed funds fail to beat their target stock market index on a consistent basis. As Graham Hooper, a director of Chase de Vere, the independent financial advisers, says: "Why should investors pay more to have their money underperform the relevant index. A lot would be better off simply investing in a tracker."

Richard Branson's Virgin Direct was instrumental in igniting the current price competition by launching an index tracker last year with the lowest charges on the market at that time. The Virgin Growth PEP has no initial charge, and an annual management charge of 1 per cent. It has been undercut by Legal & General, and Fidelity, whose MoneyBuilder Index tracks the FT-SE 100. Both PEPs make no initial charge and have an annual management fee of 0.5 per cent.

Direct Line's FT-SE tracker may seem uncompetitive in comparison, starting with an annual management charge of 1 per cent that reduces to 0.75 per cent after five years and 0.5 per cent after 10 years. But unlike Legal & General and Fidelity, which require minimum investments of pounds 3,000, the Direct Line PEP allows investors to save as little as pounds 30 on a monthly basis, or pounds 500 as a lump sum.

Michael Hayden, the managing director of Legal & General's unit trust division, says: "Our 0.5 per cent annual charge would only produce management fees of pounds 3 each year if the investor was saving pounds 50 a month. This would not cover our administration costs. We can only keep our charges low by going for economies of scale."

Virgin Direct also allows people to invest on a monthly basis but while Virgin charges a pounds 2 fee every month for collecting a minimum of pounds 50 by direct debit, Direct Line charges 30p.

Tracker funds are simple, straightforward products. At the more sophisticated end of the scale, four leading fund managers are basing this year's PEP promotion on investment trust companies. Investment trusts are collective funds structured in the form of a stock market-quoted investment company. Investors buy shares in the trust, which can be bought and sold on the Stock Exchange like the shares of any other company.

Perpetual, M&G, and Fleming are launching income-producing investment trusts, while Schroder is issuing shares in an existing fund aimed at investors particularly aiming for growth from their investments.

Mr Hooper advises investors to avoid the Fleming Worldwide Income Investment Trust. He says: "They have run into problems on their high income split capital trusts before. It's a buyer-beware investment."

The choice between Perpetual Income and Growth Investment Trust and M&G Equity Investment Trust is more difficult. M&G offers the higher income of 4.4 per cent tax-free and has lower PEP charges - no launch expenses and 1.25 per cent plus VAT for running it on an annual basis. Perpetual's anticipated income is 4 per cent, while it will cap launch costs at 4.5 per cent, make an annual charge of 1.25 per cent and carries an additional performance fee.

Mr Hooper says: "M&G's charges are more attractive and it is a good middle- of-the-road fund management company. It is smaller-companies oriented, so when smaller companies are doing well, so does M&G. Unfortunately for the past five years smaller companies haven't performed at all well.

"In comparison, Perpetual's income manager, Neil Woodford, has a really exceptional performance record, but the PEP's charges do stack up a bit. For investors more interested in income, I'd go for the M&G PEP, while those who want growth as well should go for Perpetual."

Investment trust managers traditionally set up a fund when they want to attract investors' money. But Schroder has taken the unusual route of offering more shares in its UK Growth Fund. Launch expenses are capped at 4.5 per cent and the annual management fee will be 1.2 per cent. Investors who want to put money into M&G's trust must get their application in by 3pm on Wednesday while the offer for the Schroder share issue closes at noon on the same day. Prospective Perpetual investors have until 13 March.

Fidelity has also launched a PEP fund for the more sophisticated, risk- tolerant investor. The Triple Performance PEP offers access to three Fidelity unit trusts - the Special Situations, European and South East Asia funds. Each has produced growth of more than double its benchmark index since launch and the combined five-year year-on-year growth from the funds has been above 20 per cent per annum.

The Triple Performance PEP has an initial charge of 3 per cent and an annual management fee of 1.5 per cent. Investors who buy this PEP in the 1995/96 tax year can make the same investment in the 1996/97 tax year with no initial charge.

q Schroder 0800 002000; M&G 0990 600670; Perpetual 0800 007700; Fleming 0500 500161; Legal & General 0800 116622; Fidelity 0345 100456; Direct Line 0181-253 7737.

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