Fidelity wins the race to the bottom

Tesco Bogof sign
At Fidelity, you don’t even need to buy one

The asset manager has launched free tracker funds in a bid to beat its competitors.

Fidelity Investments has won the race to the bottom. Last week, the asset manager launched the first fee-free index funds in the US. Individual investors can now choose from two index trackers – funds that track the performance of an underlying index – that come with a 0% fee, regardless of how much you invest in them. Fidelity also cut the fees on its existing equity and bond index funds by an average of 35%.

The price war between asset managers has been going on for a while now, as companies compete for customers who are increasingly aware of the impact of fees on their investment returns. In the US, Fidelity rival Vanguard offers comparable funds with expense ratios of 0.14% for a total market fund, and 0.23% for an international fund, while Charles Schwab charges just 0.03% and 0.06% respectively.

Shares in asset managers slid initially in response to Fidelity’s announcement. For example, shares in BlackRock fell by over 5% to 475p. Shareholders are, understandably, questioning how easy it will be for these companies to make money as they get dragged into ever more aggressive price wars. As Teresa Rivas points out in Barron’s, it hasn’t been a good year to be an asset manager, with the share performance of major players throughout the industry, including BlackRock, Charles Schwab, Invesco and Legg Mason, “in the red” since the start of the year.

Playing the long game

But as with most financial services that don’t charge a fee, Fidelity is banking on the idea that customers will come to them because of the highly publicised free funds, and then go on to buy other products that do charge. Indeed, it should be noted that the firm’s commitment to value has limits, notes Robin Wigglesworth in the Financial Times. Fidelity made a record $5.3bn operating profits on revenues of $18.3bn last year, and the overall cost of the move on index funds is just $47m. By contrast, one of Fidelity’s most popular actively managed fund – the $130bn Contrafund – makes almost $700m in management fees per year.

Investment firms can also make money through other means than the management fee. One option is to lend the shares they own to short-sellers (people who bet on a company’s shares going down in price) in a practice known as securities lending. However, this only generates meaningful income when done at scale, says Wigglesworth.

But for individual investors – assuming you are not invested in asset managers – this move from Fidelity is good news. Although the fee-free trackers aren’t available in the UK, this is a useful reminder that asset managers are competing for your business. Theoretically, there should be no reason not to just buy the cheapest tracker, as funds that mimic the same index should give you the same return. (Although as Rivas points out, don’t take this for granted. Double-check the tracking difference – the degree to which the return of the fund differs to that of the index – to make sure the fund is actually doing what it says it will.)

The cheapest trackers

Admittedly, with fees falling fast, there will be a point at which the benefit you get from selling out of one low-cost tracker fund and buying the latest, ever-so-slightly-lower-cost alternative, will be minor. But as it stands, if you haven’t compared tracker fees on your portfolio for a while, you can almost certainly still save a decent amount of money by swapping to the lowest-cost provider.

The cheapest FTSE All-Share trackers right now are iShares’ UK Equity Index fund and the Fidelity Index UK fund, which both charge just 0.06%. Steer clear of Virgin Money’s FTSE All-Share tracker, which charges a staggering 1% fee. This would mean you pay £100 on a £10,000 investment, relative to £6 for one of the above choices.


Activist watch

US health insurer Cigna’s $60bn takeover of pharmacy benefit manager Express Scripts is “inexplicably ridiculous”, says activist investor Carl Icahn. The insurer is “dramatically overpaying for a highly challenged business”, said Icahn in an open letter to Cigna shareholders this week, writes Cat Rutter Pooley in the Financial Times. Pharmacy benefit managers act as a middleman between drugmakers and the employers and insurance companies that buy their products.

This is big business in the US, but the model is threatened by the possibility that the Trump administration will do away with drug rebates, and by Amazon’s foray into the healthcare market. Cigna shareholders will vote on the takeover on 24 August.

Short positions… Standard Life Aberdeen suffers losses

• Asset manager GAM has tried publicly to justify its decision to suspend a top bond-fund manager last week, says the Financial Times. Last week, the Swiss company suspended London-based Tim Haywood, fixed-income investment director and head of GAM’s CHF11bn (€9.5bn) unconstrained/absolute-return bond fund. It then blocked people from pulling their money out of the fund, after investors attempted to redeem more than 10% of its assets.

The firm’s investigation into Haywood found that he may have failed to carry out sufficient due diligence on certain investments; individually signed contracts where two signatories were necessary; breached the company’s gifts and entertainment policy; and used his personal email for work purposes. However, clients have not suffered material losses, said Alexander Friedman, GAM’s chief executive. Shares in the company fell by more than 25% on the news of Haywood’s suspension.

• Standard Life Aberdeen (SLA) suffered a 12% drop in pre-tax profits in the first half of this year, blaming “challenging” conditions in the industry, says Catherine Neilan in City AM. The recently merged asset manager also saw investors pull out £16.6bn, or 2.6% of its assets under management. Shares in the company are down more than 30% since the beginning of the year.

In more positive SLA news, the asset manager has recently held meetings with boards of companies in the FTSE 100 and FTSE 250 to try to convince them to consider appointing an auditor outside of the Big Four, says Tabby Kinder in The Times. PwC, KPMG, Deloitte and EY audit 99% of Britain’s largest listed companies. A series of scandals and corporate collapses this year has raised questions about the work of auditors.