Don’t get caught by a zombie share class this Halloween! Vanguard is urging investors to check whether they’re in an old fund share class and potentially paying much more in fees than they should be.
Choosing funds can be difficult, with so many options to choose from. Even once you have decided what to invest in, funds often have more than one share class, which can be costly and confusing. While each will give you access to the same fund, manager and underlying holdings, they have different fees, meaning the returns you get on your investment could be vastly different.
Historically, different share classes for funds were launched to hold money from different investors: retail investors, professionals and the clients of financial advisers. Avoiding the need to create a range of small funds, each having the same portfolio of investments and strategy – but only of interest to a particular set of investors. Now, investors typically access funds through fund platforms, so the need for so many different share classes has reduced.
Improvements in competition and transparency have forced fees down on newer share classes, meaning investors in older options are likely paying more than they need to. The average Ongoing Charge Figure (OCF) on a UK domiciled equity index fund is 0.18%, but Vanguard has identified that there is over £5 billion in equity index fund share classes that charge over 0.50%. With some very old share classes charging as high as 1.50%.
How being in an old share class could impact your returns
Paying the lowest cost possible for the same fund could save you almost £10,000 in fees on a £10,000 investment over 20 years.
| The impact of different OCFs on a £10,000 investment over 20 years* | ||||
| 0.1% share class | 0.18% share class (average charge) | 0.5% share class | 1% share class | 1.50% share class |
| £39,592 | £38,967 | £36,564 | £33,102 | £29,966 |
| -£625 | -£3,028 | -£6,490 | -£9,626 | |
*Assuming an average annual return of 7%
James Norton head of retirement & investments, Vanguard Europe commented:
“Nobody would pay five times the price for the same car. Yet, when it comes to funds, that’s exactly what a lot of people are doing!
“Remember, the higher the fees you pay the less returns you get to keep for yourself.
“Some managers may need your permission to move you to a lower cost share class, so it is best to keep on top of any communication you receive. It is even better though, to check and make any changes yourself and make sure you’re getting the best deal possible.”
