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Investors are increasingly gravitating to low-cost funds, says Vanguard

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In the five years ending December 2013, investors allocated a greater share of their assets to low-cost products, according to a new white paper released by Vanguard Asset Management.

Costs matter: Are UK investors voting with their feet? reveals that, in equities, lower-cost funds attracted 112% (GBP129bn) of total inflows for the five-year period ending 31 December 2013, and 52% (GBP118bn) for fixed income funds.
 
The white paper outlines several reasons for the trend to lower-cost funds, including the growing popularity of index funds and particularly index-based ETFs, the impact of the Retail Distribution Review, the move towards defined contribution pension schemes and an uncertain financial market environment with muted return expectations.
 
Vanguard analysed net cash flows in UK-domiciled equity and bond mutual funds and ETFs and grouped the funds into quartiles based on their ongoing charges figures (OCFs). The findings show the majority of investors’ cash flows went into the two lowest-cost quartiles of funds, with this trend being more pronounced in equities.

The researchers also found that the cost of investing in active funds had changed little over this period but for the cost of passive funds had fallen significantly.  For example, according to data compiled from Morningstar as at 31 December 2013, the asset-weighted OCF for a passive equity fund dropped from 0.55% to 0.35% between 2009 and 2013, and for a passive bond fund, from 0.48% to 0.18%.
 
Dr Peter Westaway, Head of Vanguard’s Investment Strategy group in Europe, says: “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.  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.”

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