Virgin Money defends high charges
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Virgin Money has defended the 1% total expense ratio (TER) on its Index Tracker fund as more signs of a passive funds price war emerged last week.
After the recent launch of several low-cost trackers from Vanguard UK, HSBC Global Asset Management last week announced that from September 1, the annual management charge on its seven index tracking funds will be reduced to 0.25%.
As a result, the TERs of the funds will range from 0.27% (on its FTSE 100, FTSE 250 and FTSE All-Share trackers) to 0.37% (Pacific Index).
Virgin Money has been much criticised for its high TER. However, while saying it continues to review it charges, Virgin told Fund Strategy that although cost is an important consideration, it should not be the only consideration.
Scott Mowbray, the communications director at Virgin Money, says: “For many customers talking about AMCs, TERs, bid-offer spreads and the like it is not what they want to hear, even if it is cheaper. Some customers like to invest in something they understand and consider it to be more important than other considerations.”
But James Norton, the director of Evolve Financial Planning, (which only offers clients passive funds) says: “The only thing that matters is the tracking error and TER. The Virgin fund is at least twice as expensive as it should be.”
There is no minimum investment in the Virgin tracker, allowing investors to put in as little as £1 a month, as opposed to the typical minimum £50 a month subscription on other trackers.
Virgin says these smaller investment amount are costlier to administer and the fund allows for withdrawal at any time.
“Some companies advertise what appears to be the lowest-charging tracker, but there are often strings attached, or other charges that can bump up the cost,” said Virgin.
Norton notes the differences in business models between Virgin and other index tracker providers and says there is some advantage in being able to invest smaller amounts in the Virgin fund. But he adds the charge remains “unacceptably high”.
Virgin, however, is not alone. In terms of TERs, HBOS rank highest charging 1.51% on its UK FTSE 100 Tracker, followed by the St James Place Tracker Unit Trust, which has 1.46% TER.
Scottish Mutual charges an initial 5.25% fee for entry into its UK All-Share Index, while the Henderson UK Equity Trust has a 4.5% initial fee and the Clerical Medical FTSE 100 Tracker fund charges 4% for initial entry.
Henderson defended the high charge on its funds saying it is an institutional, one-client vehicle, that has never been actively marketed.
