LGIM’s Ellis criticises low-cost active funds after Fidelity launch

Legal & General Investment Management’s Simon Ellis has warned the low-cost active funds entering the market are not viable options for investors because of their low return targets.

In a week which saw Fidelity become the latest house to launch a range of low-cost active products, Ellis said the concept of low-cost active funds is driven by a desire to grow market share rather than provide a sustainable investment product.

He said: “They are doing it because they want to compete in the low cost funds market.

“However, the numbers on many low-cost active funds simply do not add up. They should be called ‘toxic trackers’ because ultimately they are asymmetric bets.”

Ellis said if an active tracker fund was trying to outperform an index, it would have to take a degree of risk, meaning the loss potential could outweigh the maximum upside because of the cost of the product.

LGIM has a range of passive index trackers but has ruled out the prospect of launching low cost active funds.

Fidelity’s low cost Multi Asset fund range, run by Trevor Greetham and scheduled for launch next month, has two lower cost share classes, with the A-shares running a 1% AMC and 0.5% trail commission, and the N-shares charging 0.5% AMC with no trail.

This compares with higher AMCs on the existing range of Multi Asset funds which are between 1.15% and 1.4%.

Ben Waterhouse, head of UK retail sales at Fidelity, said the funds are being launched to meet growing demand from investors, as groups look to offer lower priced products to meet the aims of RDR.

“The funds are targeting the fee-based IFA market which wants cheaper products that avoid stock selection risk,” said Waterhouse.

"By adopting an active strategy through using index components, it allows you to cut down the TER.”

Other groups have also developed similar products this year, with Schroders so far launching three low cost offerings based on existing funds.

Meanwhile, J.P. Morgan rebranded its UK Active 350 fund into the UK Active Index Plus fund, cutting the AMC to 0.25%, with fixed expenses of 0.15%.

JPM’s fund has only a single share class – stripping out commission completely – with the group targeting the passive investment universe rather than underperforming active funds.

Jasper Berens, head of UK retail sales at JPM Asset Management, was nonetheless critical of active funds which have failed to deliver for investors, and agreed some active funds will feel the squeeze as more trackers – in various guises – are launched.

“The days are numbered for the funds charging a 1.5% AMC which are not delivering alpha,” said Berens.