UK funds industry 'must try harder'

However, the investment climate for UK funds investors is still far inferior to that in the US which has the best fund transparency and the lowest fund expenses of all countries in the world.

New research from SCM Private found 40 per cent of a typical UK equities fund is simply a 'clone' or 'copy' of the overall UK stock market, with that portion being identical in weightings to the FTSE All-Share Index. However, these 'clone' funds' fees are often three times the fees of a typical index fund.

Nearly half the UK fund industry (46 per cent) was found to be 'closet indexing' compared to just 10 per cent in the US. The US funds were compared to the S&P 500 index.

However, it is still nigh on impossible for investors to identify whether a fund is an index clone because many of them only disclose their top 10 holdings on a monthly basis to investors. The full portfolio is normally disclosed only once a year via a fund's report and accounts.

UK fund managers argue that disclosing their full holdings more frequently than once a year would hurt their trading results. However, the success of ETFs that show their holdings in real time suggests that these fears are overstated.

This practice of infrequent full disclosure means the UK standards lag far behind the US. As far back as 2004, the US regulator, the Securities and Exchange Commission, has required US funds to reveal 100 per cent of their holdings online at least quarterly.

Research by Morningstar has found that the asset-weighted expense ratio of a typical fund in the US is less expensive than anywhere else in the world. Fees are lower because of economies of scale. Typically, management fees contain breakpoints that reduce fees above set levels.

In conclusion, Morningstar gave the US funds industry an overall A grade, while the UK scored B-. That's a disappointing report card.

Note: Radically different is assumed to be a 70%+ active share. UK funds compared to the FTSE All-Share index, US funds compared to the S&P 500 index.

Source: SCM Private

Source: Morningstar 2013 Global Fund Investor Experience Report