Pension investment: are you paying over the odds for ‘closet tracker’ funds?

20th February 2015


Pension savers should review their investments to make sure they are not paying active fund manager fees for ‘closet tracker’ funds.


Hargreaves Lansdown senior analyst Laith Khalaf said that the pensions world harboured ‘plenty of closet tracker…[and] investors in these funds would almost certainly be better off reviewing their holdings and moving their funds elsewhere’.


‘Usually they will be able to find a cheaper passive option, which does a similar job, or a properly actively managed fund at a similar price,’ he said.


‘Closet trackers’ are so called because despite the fund charging higher fees associated with active fund management, where the fund manager buys and sells regularly, the funds actually more closely mimic a stockmarket index like a tracker fund, also known as passive funds.


Khalaf used the Woodford Equity Income fund, run by Neil Woodford, as an example. The annual fund charge is between 0.6% and 0.75% a year for a very experienced manager whereas the Legal & General UK Index fund, which is a tracker, charges between 0.06% and 0.1% a year.


Khalaf believes the prevelance of closet trackers can be linked to savers allowing their pension money to be put into ‘default funds’ without changing them.


‘The prevelance of closet trackers in pensions is testament to an industry that has relied for too long on lacklustre default funds, and which has done little to help savers to make their own decisions,’ he said.


‘Now investors need to take matters into their own hands, and vote with their feet, if they are invested in a closet tracker fund. The best way to determine if you are in one of these funds is to look at a performance chart of your fund against its benchmark.


‘If you can’t see much difference, chances are you are invested in a fund which isn’t adding much value, and you should consider switching to a cheaper index tracker, or a properly active fund.’



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