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Experienced Investor

Are your investments wasting away in dinosaur funds?

Kit Klarenberg
Written By:
Posted:
29/05/2015
Updated:
29/05/2015

Research issued today by Hargreaves Lansdown suggests that up to £400bn is languishing in dinosaur funds.

Hargreaves Lansdown defines dinosaur funds as archaic financial products that have been superseded by more modern vehicles. While long ago shedding their utility, they remain on the market – and investors are wasting their money by using them.

The top four dinosaur funds are;

  • Stakeholder Pension Funds

According to the firm’s figures, Stakeholder Pension Funds currently hold around £100bn. Investors are charged a 1.5 per cent fee.

Hargreaves Lansdown notes that over 90 per cent of money invested in Stakeholder Pension Funds has underperformed the FTSE All-Share over the past decade.

  • Fund Manager ISAs

Fund Manager ISAs have around £75bn stored in them.

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Before the expansion of self-select ISA platforms, investors were obliged to rely on fund groups to make ISA purchases.

Fund manager ISAs only allow for investment in a select range of funds, whereas self-select ISAs allow for investment in funds run by many separate managers and providers under a single account grouping.

“Chances are, holding funds in a self-select ISA is not only more convenient than keeping them directly with a fund manager, but cheaper too,” Hargreaves Lansdown observes.

  • Child Trust Funds

According to Hargreaves Lansdown, six million Child Trust Funds, with around £5bn invested in them, simply track an index – in return for a 1.5 per cent annual charge.

“That’s more expensive than funds run by some of the best investment managers in the UK, around three times as expensive as a competitively-priced tracker fund,” Hargreaves Lansdown notes.

  • ‘Closet’ Trackers

‘Closet’ tracker funds are the worst offenders highlighted by Hargreaves Lansdown. ‘Closet’ tracker funds are those that purport to offer active management, yet mirror the performance of tracker funds in practice – if not deliver returns that are inferior to passive vehicles. The issue is so widespread that accurate estimates of how much money wallows in these funds are difficult to reach.

Some of these funds predate the invention of legitimate tracker funds, which use algorithms to follow the movement of set indexes; others are simply poorly managed modern funds. Both will charge investors far more than an actual tracker in management fees – and investors can place their money in genuinely active funds for much the same price.

However, Hargreaves Lansdown believes that ‘closet’ trackers are, thankfully, facing extinction. “These vehicles are likely to gradually get squeezed out of existence, as investors increasingly become aware of their shortcomings, and opt to use lower-cost tracker funds, or a better performing active funds, instead.”