Why do so many funds fail to do what it says on the tin? 

Let me ask you a couple of simple investment questions as you enjoy your Mail on Sunday on this (hopefully) splendid British summer day. 

They are not brain teasers as taxing as Sudoku, so please indulge me.

Question one. If a financial expert asked you which of four investment funds all run by the same group – High Income, Income & Growth, Income, and UK Strategic Income – seemed to promise you the most attractive income based on its title, which one would you plump for?

High Income? For what’s it’s worth, I would also choose it.

Tempted: A high income fund sounds very tempting indeed, but do not be lured in

Question two. If you were then asked which of the four is aimed primarily at delivering you a stream of juicy dividend income from a portfolio of UK equities that is better than that available from the stock market as a whole, which fund would you opt for?

Maybe High Income, despite no indication of a UK investment bent? Also Income, although with the same proviso? And, despite its rather pompous name, UK Strategic Income? At least it has UK in its name.

After a little contemplation, I would probably plump for the latter although my answer would not be as certain as that to question number one.

Well, you and me – we – would both be wrong. The answer to both questions is, in fact, Income & Growth. Bizarre? Yes. 

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Well, welcome to the world of investment management, a multi-billion pound industry that manages our Isas and pension funds and in the process makes a fortune for its owners and employees – but often treats us as second-class citizens.

That is, investors they have no relationship with – and wish to have no bond with – because as far as they are concerned, we are customers of the online investment platforms we hold our shares and funds with (Hargreaves Lansdown et al).

The ‘crime’ sheet against the fund management industry is as long as a giraffe’s tail.

As above (more on that later), they run investment funds that fail to deliver what they suggest they will provide on the tin.

Indeed, look no further than Woodford Equity Income, a fund up to its muddy ankles in non-income producing unquoted companies despite its income label. Talk about mislabelling. Mutton dressed up as spring lamb.

Despite the acute difficulties investment managers can experience when selling illiquid fund holdings – such as unquoted companies, private equity and direct property – many continue to hold them in unsuitable investment vehicles such as unit trusts and open-ended investment companies (jargon, jargon).

This invariably results in investor-pain when markets turn for the worse (think property funds and June 2016, think Woodford Equity Income this month).

Fund crisis: Neil Woodford is still refusing to waive fees on the suspended fund Equity Income

Fund crisis: Neil Woodford is still refusing to waive fees on the suspended fund Equity Income

It should not be allowed to happen. It shames the funds industry, with the biggest losers (of course) being investors who are left in the dark as to when they can access their money and how little they will get back.

The sheet goes on. They levy management fees that, bar the odd exception, rarely get cut or do not take into account economies of scale – namely, that the resources involved in running a £200million fund are little different from running a £1billion portfolio, so the percentage slice a fund manager creams off investors’ returns should fall accordingly.

Honourable exceptions include Vanguard and M&G that have both just announced reductions in fund charges – as well as a raft of stock-market-listed investment trusts where independent boards have beaten down charges on behalf of investors. 

For example, from the start of next month, the £200million JP Morgan US Smaller Companies trust will see its one per cent annual management fee replaced by a tiered charge – 0.9 per cent on the first £100million and then 0.75 per cent on any surplus.

Back to the crime list. Many investment houses also levy other charges against the assets of the funds we invest in, all reducing our investment gains or further deepening our losses.

My blueprint to clean up the industry 

– Bar any fund from using income in its title if it does not provide an income higher than that from the stock market it is investing in.

– Reduce annual management charges, especially on multi-billion pound funds, to give investors a bigger slice of gains.

– Make 0.5 per cent a year the new charges norm, not the exception. Investment trusts do it. Funds should too.

– Introduce tiered charges across the fund management industry, so the overall percentage charge falls the bigger a fund gets.

– All funds and trusts should publish an overall charge figure that can be directly compared across groups. No wriggle room for manipulation.

– The regulator should clamp down further on unquoted holdings of mainstream investment funds. Ideally, these should only be held by stock market-listed investment trusts.

– All funds should publish full details of their holdings so that investors can see what companies they are investing in.


– Give investors detailed notes on why a fund is deemed a best buy – not just glib marketing words.

– Tell investors if a platform receives any payment for including a fund on its best-buy list.

-Include investment trusts in best-buy lists – Hargreaves Lansdown does not.

– Disclose any director holdings in funds a platform is recommending as part of a best-buy list – and detail any personal buying or selling.

Neil Woodford

– Waive the fee on Equity Income, backdating it to when fund dealings were suspended.

Hagreaves Lansdown

– Waive exit fees, temporarily, for anyone wishing to move their money to another platform as a result of the Woodford debacle.

Although funds are compelled to quote in their literature a so-called ‘ongoing’ charge which is meant to sweep up all costs into one percentage figure, the figures are not consistent across the industry. The result is that investors are often comparing apples with pears.

Finally, as Wealth highlighted recently, many investment houses are reluctant to reveal to investors any information on fund holdings other than the top 10 positions (Woodford is one of the few honourable exceptions).

This prevents curious investors from looking through an up-to-date portfolio to see whether its contents reflect the fund’s label.

Wealth manager SCM Direct, run by former fund manager Alan Miller and anti-Brexit campaigner Gina Miller, has long campaigned for a fairer and more transparent investment industry.

In the wake of the Woodford ‘scandal’, it has called again for an end to the ‘dismal treatment of fund investors’ and published a five-point plan urging a mix of regulatory and Government intervention.

We agree. Above, we list what we believe the key players – fund managers and investment platforms – need to do as a matter of urgency to win back the trust of investors.

Fees: Hargreaves Lansdfown should waive exit fees, temporarily, for anyone wishing to move their money to another platform as a result of the Woodford debacle

Fees: Hargreaves Lansdfown should waive exit fees, temporarily, for anyone wishing to move their money to another platform as a result of the Woodford debacle

We also have some advice for Woodford, still refusing to waive fees on suspended fund Equity Income, and Hargreaves Lansdown that promoted Woodford right up until dealings in the fund were stopped.

As for the four funds I asked you the two questions about at the start, they are all managed by powerhouse Invesco.

Their respective yields – income paid over the past year, expressed as a percentage of the fund’s current unit price – are 3.63 per cent (UK Strategic Income), 3.65 per cent (High Income), 3.68 per cent (Income) and 3.86 per cent (Income & Growth).

Only one – Income & Growth – meets the criteria laid down by the fund industry’s trade association to be identified as a proper UK equity income fund.

Despite their income titles, the other three fail by virtue of their lower yields and are classified by ‘UK all companies’ funds.

It seems a case of fund mislabelling although Invesco argues otherwise, insisting it continually reviews all its promotional material to ensure fund objectives and investment policies are clearly described.

Phil Case, a former fund manager, says it is confusing for investors to be presented with so many Invesco funds with similar investment mandates.

He also says it ‘just doesn’t make sense’ to have an Income & Growth fund sitting in a UK equity income sector while a High Income fund sits outside.

His view? ‘A fund’s title should reflect what lies under its bonnet.’ Wealth couldn’t agree more.

Read more at DailyMail.co.uk