Funds do have a place in investing. They can offer investors access to market that by themselves they could not invest in due to capital requirements – such as Taiwan, or South Korea who recently changed their legislation regarding the minimum about of capital foreign investors require to deposit.
Funds also offer access to specialist niche areas of an industry which require detailed knowledge and a team of highly trained analysts – something an average retail investor could not do in their spare time.
Yet the vast majority of the thousands of funds available do not fall into this bracket, and retail investors are wrong in believing that they could not put a similar composite portfolio of stocks together themselves.
In this article we will look at the top 10 holdings of 6 of the top UK mutual funds ranked by size of assets under management. These funds have been screened using the Interactive Investor website, and to make things simpler I have chosen to screen UK based funds who have the majority of their investments in UK equities. You will also notice that they are all income funds. top UK mutual funds
Top UK Mutual Funds
Average cost of ownership of these funds, not including the initial purchasing fee, is around 1% a year in upfront costs. Mutual funds also have hidden costs of ownership. Most mutual funds are pretty expensive to run. There are managerial fees, so-called soft dollars (paid to service providers), compliance fees and marketing expenses. All paid for by you, the investors. Investopedia believe that this figure could be as high as 3-6%. Unfortunately, in many instances, it is very difficult to find out what the total cost of ownership will be.
A few percent here and there may not seem like much, but over the long term they cost investors a small fortune. The example below shows us that by saving just 0.64% a year, Ivan made $71,000 more in the long run.
A small minority of funds (and I am not suggesting this is what the funds mentioned in this article do) are also guilty of what is known in the industry as ‘churning’. This is where funds will sell a company X to be a very similar company Y – and charge this cost to the investors. An example would be selling BP to buy Shell.
But for me what is more interesting is the make up composite of these funds.
The top 10 weightings make up roughly 40-50% of the funds total composite – these companies are the real drivers in overall performance. I have highlighted all companies who are owned by 3 of more of the mutual funds. As you can see there is a clear trend of cross ownership. If you drop that variable from 3 to 2, there are only a handful of unique companies in there.
What also strikes me as interesting is that these are all big household names. Investors should be paying mutual fund managers to help them fund companies that they personally do not have the expertise to find themselves. Putting together a basket of these companies in the image above would not take longer than half a Sunday afternoon’s work.
If this is the case then why do these funds exist?
This is a hard question to answer, my initial reaction would be cross between a lack of easy to use tool to help you put together a small portfolio of stable stocks and fear. Fear that you will make a mistake, fear that the financial world is a scary, jargon riddled monster that only those with MBAs and CFAs can understand.
Believe me that this is not the case. Remember that you are the only person who is fully aligned with maximising the returns on your profit. Fund managers make their money by charging service fees. Technology makes it pain free to set up a brokerage account and to start purchasing stocks. Spend some time researching, understand how to analyse company reports and the business landscape and start investing for your future. top UK mutual funds