UK investors prefer low-cost offerings

UK investors prefer low-cost offerings

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UK investors allocated a greater share of their assets to low-cost products in the five years ending December 2013, according to a new whitepaper, Costs matter: Are UK investors voting with their feet?, from Vanguard Asset Management.

The research found that, in equities, lower-cost funds attracted 112% or £129bn ($196bn) of total inflows for the five-year period ending December 31 2013, and 52% or £118bn for fixed income funds.

“The findings show that investors are clearly voting for lower costs with their feet as, while costs have decreased for passive funds, there has not been a significant across-the-board decline in the cost of investing," said Dr. Peter Westaway, head of Vanguard’s investment strategy group in Europe. 

"Minimising costs means investors get to keep more of their returns and this research suggests the trend to low-cost investing is set to continue.” 

The white paper outlines several reasons for the trend to lower-cost funds, including the growing popularity of index funds and particularly index-based ETFs, the impact of the Retail Distribution Review, the move towards defined contribution pension schemes and an uncertain financial market environment with muted return expectations.

Vanguard analysed net cash flows in UK-domiciled equity and bond mutual funds and ETFs and grouped the funds into quartiles based on their ongoing charges figures (OCFs). 

The findings show the majority of investors’ cash flows went into the two lowest-cost quartiles of funds, with this trend being more pronounced in equities.

The researchers also found that the cost of investing in active funds had changed little over this period but for the cost of passive funds had fallen significantly. 

For example, according to data compiled from Morningstar as at 31 December 2013, the asset-weighted OCF for a passive equity fund dropped from 0.55% to 0.35% between 2009 and 2013, and for a passive bond fund, from 0.48% to 0.18%.

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