Beware Mirror FundsPosted on: 23 September 2008 by Gareth Hargreaves
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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