The Vanguard effect? HSBC slashes fees
HSBC cuts tracker fees sharply on funds for UK investors.
HSBC announced this morning that it has cut the fees of its index funds sharply. That's extremely good news, and in our view shows that a bit of healthy competition--in this case from Vanguard's recent entry into the UK market--can greatly benefit investors. Vanguard launched its suite of trackers for UK investors on 23 June, with projected TERs ranging from 0.15% to 0.55%. The prices are stunningly low for the UK market.
Vanguard vs HSBC
HSBC says it will cut the management fees on seven trackers to just 25 basis points, with projected TERs ranging from a low of 0.27% to a high of 0.37%. The key difference with Vanguard is that the HSBC offerings will carry £1,000 minimum investments, whilst the Vanguard funds carry £100,000 minimums. However, that may well be mitigated by the fact that Vanguard is seeking to make its fund available at lower minimums on fund platforms for individual investors. It has one such arrangement in place with Alliance Trust, which will make the funds available directly to individual investors starting 1 July. The Vanguard offerings are also available on adviser platforms, where again, the high minimum should not affect investors.
| Fund Name | Old/New AMC % | Old/New TER % | TER Change |
|---|---|---|---|
| HSBC FTSE 100 Index | 1.00/0.25 | 1.14/0.27 | -0.87% |
| HSBC FTSE 250 Index | 0.75/0.25 | 0.89/0.27 | -0.62% |
| HSBC FTSE All Share Index | 0.50/0.25 | 0.64/0.27 | -0.37% |
| HSBC American Index | 1.00/0.25 | 1.16/0.28 | -0.88% |
| HSBC European Index | 1.00/0.25 | 1.20/0.32 | -0.88% |
| HSBC Japan Index | 0.50/0.25 | 0.68/0.29 | -0.39% |
| HSBC Pacific Index | 0.75/0.25 | 0.99/0.37 | -0.62% |  |
The other notable difference is that none of the HSBC offerings carry initial charges, while some of the Vanguard offerings carry small purchase/redemption fees. That said, investors need to assess the total cost, not just front charges. For example, Vanguard UK Equity Index carries an initial fee of 0.50% to cover stamp duty, but its projected TER is 0.15%, 0.12% per year less than the HSBC offering. If you plan to buy and hold for the long term, then the Vanguard offering would be the better deal. If you think you'll sell in less than five years, the HSBC FTSE All Share would be the better choice. We note that the projected TER on the HSBC fund just matches that on Fidelity Moneybuilder UK Index, which also carries no initial charge and a £1,000 minimum investment.
Either way, investors benefit
While we're sure the above differences matter a great deal to the respective fund companies, we're just thrilled to finally see some fee competition in the UK fund market. We have written repeatedly about the lack of competition and the pernicious effect on investors here. If the trend continues--and the new RDR could add further fuel to the fire--investors could benefit to a huge degree.
The effect on exiting HSBC fund shareholders will be large. For example, HSBC European Index R Acc had previously levied an AMC of 1% and a TER of 1.20% That's a staggeringly high charge for a tracker and it frankly reflects poorly on HSBC that they attempted to extract so much from investors for doing so little. Now, however, shareholders in that fund class will pay just 0.32% per year. While saving 0.88% per year may not sound like much, the effect of compound returns gives it a dramatic impact over time. Over 10 years, assuming an initial investment of £10,000 and a 10% annual return, the ending value of your account would be £2,110 higher at the new, lower cost than at the old, higher cost. Over 20 years, you would gain an additional £10,155 vs. the old, higher TER, and over 30 years, you would gain an astounding £36,688 over the old higher cost shares. Beneficial, indeed.
What took so long?
While we're extremely pleased to see HSBC offering lower charges on these trackers, we have a hard time understanding a market where trackers charging anywhere close to 1% is acceptable--especially when lower cost alternatives such as ETFs have been available for some time. Given the clearly deleterious effect of fees on performance relative to the benchmark, we expect advisers would be extremely cautious about using trackers with fees that weren't competitive. That doesn't appear to have been the case thus far, but here's hoping that it is going forward. Between offerings from HSBC, Vanguard and Fidelity and the plethora of cheap ETFs available on the LSE, there's no good investment reason that it shouldn't.
