Beware Mirror Funds
Finance expert Peter McGahan explains what a mirror fund is.
When you invest within a pension fund or an investment bond you are offered a range of funds to choose from.
Often they are simply an array of in house funds which are at best average.
Beyond that, you may also be offered a range of ‘external’ funds. This refers to the option of accessing the better external managers such as Invesco, Jupiter, Neptune and so on, as opposed to using the rather antiquated insurance company funds with the turning speed of a large ship - after it had sunk.
Such funds are very large and find it difficult to outperform as they have such enormous holdings in certain stocks and can’t really turn them round quickly, hence the underperformance.
In an attempt to remedy this, many investors look to use the external managers as above to gain the best returns. What most don’t understand is that they rarely get the real fund they believe they are.
In an attempt to save costs or make an extra margin - perhaps, ‘mirrored’ versions of the funds are chosen instead. Whilst you may believe you are investing into Fidelity special situations for example, you may be invested into a mutated version. It will normally have the name of the company at the front of the fund such as AIG life Fidelity Special situations. Whilst you may think your performance is the same you would be badly mistaken.
I had a look at the performance of fidelity special sits within Canada life, Friends Provident, Scottish Mutual and AIG over three years. AIG had returned a healthy 50.2 per cent over the period. Naturally we would expect Fidelity special sits to return exactly the same. Well you would wouldn’t you. Prepare yourself. A customer who invested directly with Fidelity would be over 33 per cent better off than had they invested with AIG. That’s 33 per cent better over just three years.
Over five years, the numbers are really quite startling. Scottish Mutual returned a lovely 127.45 per cent, AIG a pretty 111.6 per cent, but once again the customer who used the financial adviser to end up with one of these middlemen would have been disadvantaged.
An investment with Fidelity special sits directly would have returned 164.67 per cent! That’s a staggering 10 per cent per year charge for having dealt with a financial adviser. Some customers may well think that’s expensive for what they are getting. Perhaps.
Those who are most likely to be invested in a mirror fund are investors who have bought an onshore bond, and the very interesting thing about this is that most investments I see that are placed by some of the banks are in investment bonds!
If you have a pension fund or investment bond it would be well worth your time talking to the company and getting them to confirm in writing that you are not in a mirror fund and that you are indeed in the actual retail fund itself.
Figures source: Lipper
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Peter McGahan is an Independent Financial Adviser and Managing Director of Worldwide Financial Planning. Worldwide has won 16 Financial Times awards in the last four years.
Peter comments regularly in major journals such as the Mail on Sunday, Irish News and Sunday Times and is a weekly columnist for FT Adviser. He has also appeared on Working Lunch and the Today programme. In addition he is an expert on international tax matters for a range of international publications.
To ask Peter a question email connect@50connect.com, leave a comment below or visit the 50connect forum.
Worldwide Financial Planning Ltd are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made. The above represents the personal opinions of Peter McGahan. All information is based on understanding of current tax practices, which are subject to change. The value of shares and investments can go down as well as up.
If you have a financial query you would like Worldwide Financial Planning to respond to call 0845 230 9876 or for futher information visit www.wwfp.net.
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