Titled ‘Costs matter: Are UK investors voting with their feet?’ the paper says that in equities lower cost funds attracted 91% (£106bn) of total inflows for the five-year period ending 31 December 2013, and the figure was 52% (£118bn) for fixed income funds.
The paper offers up several reasons for the trend, including the growing popularity of index funds, particularly index-based ETFs. The impact of the Retail Distribution Review got a mention as did the move towards defined contribution pension schemes and ‘an uncertain financial market environment with muted return expectations.’
In drawing its conclusions the firm analysed net cash flows in UK-domiciled equity and bond mutual funds and ETFs, grouping the funds into quartiles based on their ongoing charges figures.
The researchers also found that the cost of investing in active funds changed little over this period but the cost of passive funds fell significantly.
“The findings show that investors are clearly voting for lower costs with their feet as, while costs have decreased for passive funds, there has not been a significant across-the-board decline in the cost of investing,” said Dr Peter Westaway, head of Vanguard’s investment strategy group in Europe.
“Minimising costs means investors get to keep more of their returns and this research suggests the trend to low-cost investing is set to continue,” he added.
The full white paper is available by contacting Vanguard.
