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Tracker funds surge in popularity as providers cut fees

Tracker funds made record sales of £590m during October
December 3, 2014

Net retail sales of passive tracker funds hit a record £590m during October, according to the Investment Management Association - the highest level since July, when net retail sales hit £558m.

Tracker fund assets under management totalled £89.3bn at the end of October 2014, taking their overall share of industry funds under management to 10.9 per cent - their highest level to date - up from 9.7 per cent in October 2013.

Tracker fund provider Legal & General Investment Management predicts tracker funds' share will continue to grow significantly, reaching 19 per cent of industry funds under management by 2020.

"A combination of volatile markets and a focus on the total cost of ownership has resulted in a continued interest in passive funds," said Adrian Lowcock, head of investing at AXA Wealth. "This is a trend we expect to continue as investors combine active managers in areas such as the UK, with low-cost passive funds to access markets such as the US where there isn't a great active choice available."

Laith Khalaf, senior analyst at Hargreaves Lansdown, said recent cuts in the costs of tracker funds by a couple of the major players - Legal & General and Vanguard - have also helped boost their popularity, although L&G's cut did not come into effect until 1 November. "Tracker funds increasingly offer investors access to a low-cost core and explore portfolio strategy," he says.

Legal & General Investment Management has applied reductions of up to 55 per cent on the ongoing charges on a number of its index funds. The reduced charges apply to the I unit class of the funds, which are available on platforms or via advisers.

Legal & General Investment Management fee cuts

FundFormer ongoing charge (%)Ongoing charge since 1 November (%)
L&G All Stocks Gilt Index0.180.15
L&G All Stocks Index Linked Gilt Index0.180.15
L&G European Index0.20.12
L&G Global 100 Index0.260.14
L&G GEM Index0.430.33
L&G International Index0.310.14
L&G Japan Index0.190.15
L&G Pacific Index0.220.19
L&G Short Dated Stlg Corp Bond0.210.15
L&G Sterling Corporate Bond0.190.15
L&G UK 100 Index0.180.1
L&G UK Index0.170.1
L&G US Index0.180.1

Source: Legal & General Investment Management

Vanguard's fee cuts took effect from 1 September. The ongoing charges of its index funds now range from 0.08 per cent to 0.38 per cent, although for some funds you have to pay a purchase cost to compensate for Stamp Duty Reserve Tax expenses.

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Although tracker funds generally have low charges, how you choose to buy them will also affect your ultimate cost as some investment platforms charge far more than others.