Is a Ford Fiesta the ultimate ‘value for money’?

What you’ll learn:

• Why is ‘value for money’ so important?
• What is an Assessment of Value report?
• What does the future hold?
  

The number one best-selling car in the UK today is not the Sandero, it’s the Ford Fiesta. A new Fiesta costs over twice that of a new Dacia Sandero¹. What’s wrong with the Sandero? It still gets you from A to Z, it passes all the stringent European crash tests, and it’s actually not a bad looking car. So what is it about the Fiesta? It’s value for money. Consumers are willing to pay more for a Fiesta than they are for a Sandero, for whatever reason. Maybe the extra airbags? The nippier engine? Or just a different badge?

And it’s the same with everything we buy. We don’t always buy the cheapest food in the supermarket. We don’t always buy the cheapest clothes on the high street. But is it the same with your investments?

A focus on costs

It was Benjamin Franklin who once said there are only two certainties in life: death and taxes. When it comes to investing, there is only one certainty: costs. So, if you can keep your costs low, you stand a better chance of succeeding. We agree – that’s a good starting point. However, we feel there are times when it’s worth paying more for an investment fund. Like the Ford Fiesta. But only when it’s worth it. When you can clearly see ‘value for money’.

Value for money – funds

Back in the 1990s, the launch of the Virgin FTSE All-Share Tracker Fund heralded a new dawn for investing. It offered cheap exposure to the UK stock market without the need to pick and choose which active manager to invest with and whether they would outperform their benchmark or not. Since then, the world of passive investing has exploded in the UK. At the end of 2019, passive funds made up eight out of the 10 largest funds in the UK, compared to just three a year earlier².

This transformation in the investment landscape has also brought with it a monumental change – lower costs. Today, it is possible to find a passive fund that tracks the UK stock market with an annual ongoing charge (OCF) of just 0.06% per annum. This represents a remarkable 94% reduction from the cost of the Virgin Fund, 25 years ago.

The ‘average’ fund

The argument for passive over active funds is compelling. Looking at our offering on Barclays Smart Investor, there are currently 223 UK equity funds which have a five-year track record³. The sector is made up mainly of active funds, but it does include a few passive tracker funds. Of these 223 funds, only 67 have outperformed the HSBC FTSE 100 Tracker Fund over this five-year period. This leaves nearly 70% of the funds having underperformed a cheap passive fund. Note that past performance is not a reliable guide to future performance. So, if you had simply chosen the ‘average’ fund, you would have underperformed. This makes the case for using passive funds very strong. But we would never advocate investing in an ‘average’ fund.

The average cost of an active fund is higher than that of a passive fund, as you would expect. Sticking with the UK equity sector, the average OCF of an active UK equity fund is c.0.80% per annum, which is many times higher than the 0.06% of the HSBC FTSE 100 Tracker Fund. Therefore, you need to be confident that you are buying the right fund. Especially when you can simply buy a passive fund for less than 10% of the cost. This is where the ‘value for money’ argument comes in, because there are some funds out there which are worth it. But you have to put the effort in to find them, or leave it to an ‘expert’ to do it for you. Otherwise you end up with the ‘average’ fund.

To help avoid an average fund, we believe there are a number of factors that need to be considered, including the strength of the fund management company itself, the ability of their team to apply a consistent and repeatable investment process, and the need to be confident that the manager is not taking any ‘unintended’ risks. Find out more about how we choose funds.

Assessment of Value Reports

During the last year, the industry regulator – the Financial Conduct Authority (FCA) – has introduced a new ‘rule’, dictating that each fund management company must produce an annual ‘Assessment of Value Report’ for each fund. The document aims to focus on the ‘value for money’ that investors are getting from their funds. The danger was that these reports would be buried deep within websites or in their annual reports. But actually, the opposite has happened. These reports can be found via a simple Google search, and the fund management companies have been quite vocal in stating which of their funds do not offer value for money. As a result, we have seen a significant number of cuts in fees charged by these funds. In our view, it has been one of the most constructive steps in the industry for years. Read the Assessment of Value report for funds run by Barclays. [PDF, 683KB]

Where next?

Go back 10 years and performance data was one of the few pieces of data available, which you could use to compare one fund to another. In 2012, the regulator introduced the Key Investor Information Document (KIID), which is a mandatory statement that includes the total cost of each fund, thus giving a level playing field to compare products. The Assessment of Value reports have now taken this one step further and identified those funds where the performance and the costs do not offer value for money. Although it must be stressed that these Assessment of Value reports are not tools that can be used by themselves to find the best investment funds.

As we go forward, we believe the focus on active funds will intensify further. Passive funds have arguably become as cheap as they ever will be. The underperforming active funds, and those identified as not offering value for money, will find increasing pressure from the regulator to cut fees to look more like a passive fund (especially if they are delivering performance in line with that of a passive fund). And this will leave us with a pool of strong and consistent active managers, which offer the best potential to outperform. These active funds will not be cheap, but they could well offer good value for money.

Where’s the Dacia Sandero?

A very good question. If the UK roads were like the investment world, more than half of car owners would be driving a Sandero. And it makes sense – passive funds are the new benchmark which active funds are judged by. In fact, when we observe how first time investors dip their toes into the world of investments we typically see passive funds being used widely. The first step in long-term investing is to build a diversified portfolio. Such a diversified portfolio can be built easily with passive investments, as we do with our Barclays range of Ready-Made Investments (RMI).

Our RMI funds are multi-asset portfolios that invest in passive funds. ‘Multi-asset’ means they invest across a wide range of bonds and shares in markets around the world. Costs are kept down by using passive funds to make the investments, but Barclays actively manages the proportion of the allocation of the assets of each fund to ensure it stays in line with the risk and reward objective.

The next step, as you move into active managers, is to carry out the extensive work to assess which active managers offer value for money. As a result, we find there are good active managers out there, offering value for money, but they can sometimes be difficult to find. But when you find the Ford Fiestas of the investment world, they have certainly been worth it (though of course there’s no guarantee that that will continue)!

How to invest?

We believe that the best way to achieve your long-term investment goals is to have a diversified portfolio. To help you we’ve created our Funds List – it’s made up of funds we like from the sectors we believe are key to building a diversified portfolio. Within each sector, there’s a mix of investment focus and investment approaches to choose from. So why not take a look at our selection?

Alternatively, there are many passive investments available, such as tracker funds and exchange traded funds (ETFs), which simply track the performance of a particular market at a relatively low cost.

However, it is important to remember not to put all your eggs in one basket. To diversify your investment, you may like to consider our own Barclays Ready-made Investments (RMI). The RMI are just one example of a range of diversified funds which allow you to select the level of risk you are most comfortable with. These multi-asset funds invest in passive funds across a range of asset classes and regions, offering a globally diversified one-stop solution for investors. Ready-made Investments are not the only funds that we offer and they won’t be appropriate for everyone. 

Whichever option you choose, or whether you decide to invest in both active and passive funds, you must accept that all investments can still fall in value as well as rise and you might get back less than you invest.

We don’t offer personal investment advice so if you’re unsure you should seek that independently.

Funds are designed for the long term so you should only consider them if you can stay invested for at least five years.

These are our current opinions but the future, as ever, is uncertain and outcomes may differ.

Find out more about our Ready-made Investments.