Low cost fund manager Vanguard argues that investors in higher charging funds may be paying nearly £10,000 in extra fees over 30 years of investing

17th February 2014

Passive specialist fund manager Vanguard has crunched some numbers to back its argument that low cost funds represent the best value this Isa season. The firm argues that a long-term investor in a stocks and shares ISA could be overpaying nearly £10,000 in fees over 30 years using a hypothetical portfolio.

Vanguard’s data bids to illustrate the effect of fees for an investor making the full 2013/14 Stocks and Shares ISA contribution of £11,520 and then continued investment. It says this highlights the difference between what is paid by an investor with ongoing charges of 1.5% per annum, versus an investor with ongoing charges of 0.5% per annum.  The figures reveal that, over 30 years, the effect of fees could make a significant difference to retirement savings.  A low-cost investor paying 0.50% could benefit from a portfolio 34.9% larger compared to someone paying 1.5%, a difference of more than £9,800 in an investor’s pocket.

Assumed Return 5%*
Initial contribution £11,520

 

Years Ongoing charge0.50% Ongoing charge1.00% Ongoing charge1.50% % difference in size of portfolio
5 £14,066 £13,720 £13,382 5.11%
10 £17,174 £16,339 £15,545 10.4%
15 £20,970 £19,459 £18,057 16.1%
20 £25,604 £23,175 £20,975 22.1%
25 £31,263 £27,600 £24,365 28.3%
30 £38,171 £32,870 £28,303 34.9%

Source: Vanguard Asset Management, Limited 2014.

*Assumes a 5% nominal annual return and 0.5% inflation, i.e. a 4.5% real annual return.

Vanguard adds that this is a hypothetical example and does not relate to any particular portfolio. Any projections should be regarded as hypothetical in nature and do not reflect or guarantee future results.

Nick Blake, Head of Retail at Vanguard, says: “There is no doubt that many ISA investors are looking for the best return.  When considering how to grow their money, it’s important that investors don’t forget the compound impact of fees.  Ignoring the costs of the underlying funds in an ISA can be painful and can even eradicate the tax benefit of ISA investing.  The more investors pay out in fees, the less of their money is being put to work for their benefit.

“It can be tempting during ISA season to look at what’s been performing well and invest your ISA allowance into it without further thought.  However, costs should really be at the forefront of investors’ minds.  Alongside the important principle of reducing cost to achieve investment success, we believe investors and their advisers should consider three additional simple principles.  Vanguard encourages advisers and investors to: (1) focus on creating clear, appropriate investment goals to help inform their investment plan; (2) establish a suitable asset allocation by using broadly diversified funds; and (3) maintain perspective and a long-term discipline.”

Read more: Mindful Money contributor and financial planner Lee Robertson asks Is it passive versus active or is there a middle way?

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