Research conducted by wealth management company SCM Private has found that the average active fund within the UK All Companies sector has an average Total Expense Ratio (TER) of nearly four times the average All Share ETF tracker, with the 'true cost' of these funds even higher.
SCM Private's research analysed 233 IMA UK All Companies funds, accounting for £66bn of investors savings, to establish exactly how much of their portfolios is in essence an index tracker and how much is genuinely active to determine the 'true cost' of UK active fund management.
The findings found the average total expense ratio (TER) of these funds to be 1.6 per cent per annum, while the average 'true cost' of the active management within these funds stood at 6 per cent per annum - nearly four times their reported TER - and 15 times the average equivalent ETF fee.
To calculate the 'true cost', SCM identified the proportion of these funds' portfolios which are really "a closet index-tracker" (portfolios very similar to the index ) versus the proportion that are genuinely active. By assuming that the index element of each of these funds could be bought via an ETF charging 0.4 per cent per annum, rather than the average 1.6 per cent TER of these funds, the difference in charges was applied to the actively managed part of each of the funds.
SCM Private's co-founder, Alan Miller, said: "Our research appears to indicate that many fund managers' portfolios are really just closet index funds with a bit of active management around the edges, presumably in order to justify high fees. These high fees are very often compounded by poor stock selection.
"We wholeheartedly believe that the vast majority of private investors would be better off by investing in ETFs offering lower costs, flexibility, transparency and liquidity."
Mr Miller added that the lower charges of ETFs can give a significant boost to performance over time. "We believe by actively managing our ETF portfolios we can achieve even higher returns for our clients," he said.
SCM's investment proposition offers two portfolios - a Long-Term Return fund, "akin to an old-fashioned pension fund", and a more aggressive Absolute Return portfolio. Both portfolios are invested solely in ETFs and are available in three currencies. All investments are held in the client's own name with annual management fees set at 0.75 per cent with a 5 per cent performance charge of the annual gain and no entry/exit commissions.
