26th October 2011
The Z share is a new class of investment that will form part of many open-ended investment companies –OEICs (sometimes better known as unit trusts). By halving annual charges, investors will enjoy better returns whatever the underlying success or otherwise of the fund managers.
Most unit trusts now have annual management charges of 1.5%. So a fund generating a 6% return will only offer around 4.5% after fees. A long term investor with £10,000 would have £15,550 with income reinvested (but ignoring taxation) after 10 years and £24,117 after 20 years.
Now put the same fund into a lower management fee structure with annual charges at 0.75% – so the fund progresses around 5.25% every twelve months. Over 20 years, the fund is now worth £27,825 while at the end of 10 years, it is valued at £16,681.
Simply by opting for a lower cost version, the 20 year investor is £3,708 better off while the 10 year holder is £1,131 richer.
Where would these savings otherwise go? The simple answer is into the pockets of financial advisers and to the "platforms", (like fund supermarkets but for advisers rather than private investors). It pays for rebates to advisers and for trail commission, usually 0.5% a year during the product's life. But there is little, if any, difference in the amount the fund managers themselves collect.
Schroders is the first major group to launch the Z share. Next month, the new half price units go on sale across the 35 UK based unit trusts.
Schroders – and others who will launch similar initiatives over the next months – has set up the Z share in response to the need to "unbundled" pricing mechanisms under the forthcoming retail distribution review (RDR) which the FSA has ordered.
Unbundling means separating what the adviser gets from the amount the fund manager earns. Schroders says the Z shares will have "clean" fees.
Investors who opt for Z shares will have two options. They could buy the units directly from the fund manager and pay the reduced fee. This will be comparable to purchasing investment trust shares through savings schemes – the present price differential compared with the lower cost investment trusts will narrow.
Alternatively, investors could buy Z shares but come to a fees arrangement with their adviser or broker. This could be part of an overall set management fee or based on a percentage or possibly connected to a rebate structure.
But in either case, there will be a greater clarity over what the annual management charge pays for – advisers and platforms will have to make each part of the overall fee clear to investors.
Schroders' Robin Stoakley, said: "From November 8, we consider ourselves to be as RDR-ready as we can be. The most efficient way to operate with platforms [under RDR] will be clean-fee classes."
Schroders will have to launch roughly 70 new share classes to offer Z-shares on its entire range.
This follows a move earlier this year by Schroders to launch three low cost funds – with typical total expense ratios of around 0.4%. One, the.QEP Global Core Fund, now has over £500m under management.
Investors can expect other unbundled offerings from other fund managers although not all intend going down the Z share route. Others might work on higher costs but with rebates to selected investors.
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