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The highly-rated UK funds that won’t break the bank

24 September 2018

FE Trustnet reveals the top-rated UK equity funds that have a lower ongoing charges figure than their peers.

By Maitane Sardon,

Reporter, FE Trustnet

For investors worried about fund charges, it can sometimes be difficult to find cheap highly-rated active strategies. But some bargains can be found among of the industry’s best-regarded funds.

Indeed, Baillie Gifford UK Equity Alpha, Quilter Investors UK Equity Growth, LF Lindsell Train UK Equity and Marlborough Nano Cap Growth are the four top-rated UK funds with charges lower than the sector average, FE Trustnet has discovered.

Although the current investment backdrop – characterised by synchronised global growth and positive gains – has taken fund charges out of the spotlight, the always-controversial topic is never far from investors’ thoughts.

Fund charges will also become increasingly important if – and when – markets stop enjoying the current ride and investors start seeing negative returns.

This will lead to a comeback of the overall focus on finding the best performing funds at the lowest cost, and value for money.

Given the topic will likely be increasingly important going forward, at FE Trustnet we decided to look at the Investment Association (IA) sectors and find out which highly rated funds charge investors less than their peers.

To do so, we first calculated the average ongoing charges figure (OCF) – consisting of the annual management charge and other expenses – for every sector in the IA (with data to last-month-end).

Investment Association sectors’ average OCF

 

Source: FE Analytics

We then filtered the results by rating and were left with four funds from the main IA UK equity sectors - IA UK All Companies, IA UK Equity Income, and IA UK Smaller Companies - that have OCFs lower than the median and hold the maximum of five FE Crowns.

Of these four funds, three were located in the IA UK All Companies sector and one resides in the IA UK Smaller Companies peer group. There were no funds with a five FE Crown rating from the IA UK Equity Income sector with a lower-than-median OCF.

Although some funds may have lower charges, we have only included those with the highest rating by the FE Invest team.

As the above chart shows, the average OCF for funds in the IA UK All Companies sector is 0.86 per cent. Funds sitting in the IA UK Smaller Companies sector have an average OCF of 1.01 per cent.


Baillie Gifford UK Equity Alpha

With an ongoing charges figure of 0.57 per cent, Baillie Gifford UK Equity Alpha is the cheapest five FE Crown-rated fund in the IA UK All Companies sector.

The £385.5m strategy has been run by Gerard Callahan since 2010 and aims to deliver returns in excess of the total return on the FTSE All Share index over the long term.

According to Square Mile Investment Consulting & Research, Baillie Gifford UK Equity Alpha’s annual management charge is below that of the median actively managed fund in the IA UK All Companies sector.

That, together with the fact further expenses are limited, result in an OCF lower than the sector median.

“In our view, this leaves the strategy with a very competitive cost structure when compared to other actively-managed funds investing in the UK equity market,” they said.

Baillie Gifford UK Equity Alpha cost vs sector



Source: Square Mile Investment Consulting & Research

As they noted, following the introduction of MiFID II regulations in January 2018, asset management firms are now required to be more transparent by disclosing all costs and charges related to the running and administration of funds. This can include items outside of the OCF such as research costs.

Baillie Gifford absorbs the costs associated with their research, which reduces the overall fee paid by investors.

The fund is up by 54.09 per cent over five years, ahead of the IA UK All Companies sector and the FTSE All Share index respective gains of 40.48 per cent and 38.95 per cent.

 

LF Lindsell Train UK Equity

An ongoing charges figure of 0.70 per cent makes LF Lindsell Train UK Equity the second cheapest five FE Crown-rated fund investing in UK equities.


The fund not only holds the maximum number of FE crowns but is also included in the FE Invest Approved list and is run by an FE Alpha Manager, the veteran investor Nick Train.

“We consider the fund charges to be extremely competitive,” Square Mile analysts noted. “Its annual management charge is at the lower end of the peer group and its ongoing charges figure is well below the sector median.

“We consider this fund to be among the most compelling in the asset class and its charging structure is a further reason why we have awarded it our highest rating.”

LF Lindsell Train UK Equity cost vs sector

 

Source: Square Mile Investment Consulting & Research

Over five years, LF Lindsell Train UK Equity has delivered a 78.86 per cent total return compared with a 40.48 per cent gain for the average fund in the IA UK All Companies sector and a gain of 38.95 per cent for the FTSE All Share index.

 

Quilter Investors UK Equity Growth

Next up is the £153m Quilter Investors UK Equity Growth, which has an OCF of 0.75 per cent.

The growth-focused fund aims to achieve capital growth by investing directly and indirectly, in shares of UK companies.

Quilter Investors UK Equity Growth has been overseen by Newton Investment Management since 2017.

By sector, more than a quarter of the fund is invested in industrials. It has a 17.1 per cent in financials and a 12.8 per cent in energy stocks.

Over five years, Quilter Investors UK Equity Growth has delivered a 32.42 per cent total return compared with a 40.48 per cent gain by the average fund in the IA UK All Companies sector.

 

Marlborough Nano Cap Growth

Finally, the only highly-rated fund in the IA UK Smaller Companies sector with a lower OCF than its average peer is Marlborough Nano Cap Growth.

The £200.9m strategy is overseen by two FE Alpha Managers, David Walton and Giles Hargreave, who co-manage the fund alongside Guy Feld.

The fund aims to provide capital growth in excess of that achieved by the FTSE SmallCap index (excluding investment companies) over the long term.

Marlborough Nano Cap Growth has been top quartile over one, three and five years and has delivered an 89.54 per cent total return compared with a 72.74 per cent gain for the IA UK Smaller Companies sector over the latter period.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.