A whopping £400 billion is held in 'dinosaur' investment funds in the UK. Some of these funds started life as long ago as the 1970s, and look ill-suited to the modern investment environment. Most of us wouldn't dream of having a television set, or a car, that was this old, but for some reason these old-fashioned investments still seem to hang on to a lot of investors' money.
With Profits funds
These funds were popular in the 1970s, 80s and 90s because they promised investors access to the stock market with smoother returns. They fell into disrepute at the turn of the century, when investors' policy values were substantially cut. The highest profile casualties were members of the Equitable Life With Profits fund, who have recently won compensation from the government after years of campaigning.
There is still approximately £220 billion invested in With Profits funds, according to consultants AKG. Investors hold these funds through pensions, mortgage endowments, with profits bonds and life assurance plans. One of the problems with these funds is they don't offer great transparency. Everybody's money is pooled together in the fund and investors have to rely on the insurance company to give them their fair share of profits, with little visibility of costs. However, some With Profits policies do have valuable guarantees attached to them, and in some cases carry exit penalties.
Child Trust Funds
There are around six million Child Trust Fund accounts with £5 billion invested in them. Some of the funds available in Child Trust Funds are index tracker funds, but charge 1.5% a year. That's more expensive than actively managed funds run by some of the best investment managers in the UK and around three times as expensive as a competitively priced tracker fund.
No further payments are being made into these schemes by the government, although investors can still make contributions. The good news is from 6th April this year, it has been possible to transfer Child Trust Funds into a Junior ISA, which can open up a much wider choice of funds, including some very good active funds, and some low cost tracker funds too.
Stakeholder Pension funds
Stakeholder Pensions were launched in 2001 and at the time were a ground-breaking, low- cost product. However these pensions can charge up to 1.5% for the first ten years from the initial investment, and 1% thereafter. By today's standards this looks expensive, unless you are investing with a talented fund manager.
The reality is usually you aren't. Over 90% of money invested in UK funds within Stakeholder Pensions has underperformed the FTSE All-Share over the last ten years. This isn't too surprising. Many of these funds were built to be average, so when charges are deducted, the result is often disappointing performance. There is currently around £100 billion invested in Stakeholder Pensions. Investors do have the opportunity to transfer them to a more modern pension arrangement. However, they should first check they will not lose any valuable guarantees.
Fund Manager ISAs
The vast majority of people who take out a Stocks & Shares ISA today do so through an investment platform like our Vantage Service. But before accounts like the Vantage Stocks & Shares ISA existed, investors used to take out ISAs (and PEPs before them) directly with fund managers.
Investors use platform ISAs nowadays because it allows them to invest in funds run by different fund management companies in the same account, so investors can mix and match, picking the strongest fund managers in each area. ISAs provided by a fund management company, on the other hand, will only permit investment into their own range of funds.
Chances are that holding funds in an ISA like our Vantage ISA is not only more convenient than keeping them directly with a fund manager, but is probably cheaper too. Despite this, and the ease with which ISAs can be moved, £75 billion remains in ISAs held directly with fund managers.
These 'dinosaur' funds may be relics of the past, though they should not be discarded simply because of their age. Some of the top-performing funds and managers have a long history. However, their performance and charges should be reviewed and compared to other products now available. The likelihood is many investors may not have looked closely at these investments in years or searched for more modern, better performing and lower cost alternatives.
The value of investments can go down in value as well as up, so you could get back less than you invest. It is therefore important that you understand the risks and commitments. This website is not personal advice based on your circumstances. So you can make informed decisions for yourself we aim to provide you with the best information, best service and best prices. If you are unsure about the suitability of an investment please contact us for advice.