The uproar over the new Hargreaves Lansdown fees imposed on index trackers has brought into focus a relatively obscure tracker fund family that potentially offers a fee-dodging workaround.
A number of Monevator readers have alighted on the BlackRock Collective Investment Funds (CIFs) as a cheaper alternative for passive investors who want to stay with Hargreaves Lansdown but who are being punished by flat-rate fees on small portfolios.
The BlackRock CIF index trackers are free of Hargreaves Lansdown’s platform fees. And as they supply two to three times the commission paid by HSBC index funds, things might just stay that way for the foreseeable.
The workaround
The smaller your fund holdings the more likely it is that the BlackRock index trackers will work out more cheaply for you. Here’s the logic:
HSBC FTSE All-Share Index fund TER = 0.27%
Platform fee = £24 per year
BlackRock UK Equity Tracker Class A TER = 0.57%
Platform fee = £0
The HSBC fund has the cheaper TER but its platform fee means the breakeven point for annual costs between the two funds is £8,000.
X% + 0.27% = 0.57% (i.e. the same TER as the Blackrock Tracker fund)
Therefore X% = 0.3%
Platform fee is £24 a year, so breakeven fund size is…
£24/0.3% = £8,000
Which all goes to show that if your HSBC FTSE All-Share fund is worth less than £8,000 then you’ll pay an annual cost that’s higher than the 0.57% burden of the equivalent BlackRock fund.
Not so fast
Of course, it’s not so simple. Not by a long chalk, my friends. There’s an additional cost to pay every time you trade the BlackRock tracker funds in the shape of the bid-offer spread.
Just like with foreign currency, you pay a higher price to buy the funds and get a lower price if you sell them, while a grinning middleman pockets the difference.
As I write, the spread for the BlackRock UK Equity Tracker Class A fund is a yawning 5.57%! Normally, if you buy a fund for 5.57% more than you can sell it, then you are instantly down 5.57% on the deal.
But happily this isn’t yet another case of legalised banditry by the financial services industry: the situation is not as bad as it seems.
BlackRock tracker funds are subject to an initial charge of 5% and this shows up in the buying price as the main chunk of the spread.
Now, an initial charge is the kind of legalised banditry that passive investors should never stump up for – but Hargreaves Lansdown kindly rebates the whole 5% on the BlackRock funds.
The remaining 0.57% spread is still a pretty fat one to pay though. It’s the kind of bid-offer gulf I’d expect from an emerging market ETF rather than a UK equity fund.
Does the spread put the kybosh on a switch to BlackRock tracker funds? It depends on:
- How often you trade
- The size of the spread for that fund when you trade (it might be less than 0.57% that day)
BlackRock have published estimated spreads for their CIF tracker funds on page 10 of the simplified prospectus. Look for the A Class funds.
You can calculate how the spread affects your own situation by using a fund cost comparison calculator. Input the spread as an initial charge (leaving out the discounted 5% portion).
Between a BlackRock and a hard place
Even if the calculations swing in favour of a move, make sure you do your research. Especially look out for:
- Which index your new fund tracks. The BlackRock tracker funds aren’t necessarily following the same index as your existing funds.
- How well does each fund track the index? Tracking difference could easily wipe out the sliver of costs you save by switching.
The BlackRock tracker funds certainly open up new possibilities for UK passive investors but they’ve got more wrinkles than an elephant’s leg. Go here for a Monevator botox injection.
Take it steady,
The Accumulator
many thanks for the article – answers the questions that have been swilling round my grey cells over the past week.
one quick question though – am I right in thinking investment funds normally have a bid-offer spread but OEICs don’t?
And that the BlackRock products are Investment Funds but the HSBC products are OEICs?
As always, thank you for such an informative and useful piece.
One follow up questions I have relates to what people think of BlackRock’s passively managed funds of funds. I have been very interested in Vanguard’s LifeStrategy funds, as they eliminate the need for rebalancing while still quite inexpensive. I may yet switch to them, particularly if they become available on HL with the current platform fees – as seems possible quite soon. However, while waiting, I wonder whether BlackRock Global Consensus and BlackRock Managed Consensus are a viable – if somewhat more expensive – alternative.
I would appreciate – and look forward to – any views.
An interesting article which has left me thinking about my own fund choices, and the TERs I’m paying.
I’d also like to add a third (loosely) related question to the comments:
When I started investing, I decided to split my monthly (UK equity) purchasesbetween the HSBC FTSE All Share (TER 0.27%), Fidelity Moneybuilder UK Index (TER 0.3%), and L&G UK Index (TER 0.56%). Partly for further diversification (should any one provider have issues), partly because I couldn’t come to a decision about which to choose.
Can anyone see any reason I should keep all three (such as justificaiton in diversification theory), or should I be looking to sell up the Fidelity and L&G in order to switch to HSBC? In the case of these three, is it all about TER?
(I pay no fees/charges with my current ISA provider)
I believe the BlackRock tracker funds (institutional class) with similar TER’s to HSBC are available using Skandia CRE via CommShare – costs as follows:
Summary of charges for Skandia’s CRA set up via CommShare
Establishment charge – free
Annual platform fee – £68.50 p.a. (this fee pays for all accounts held on the platform per investor)
CommShare’s fee – 0.25% of the pension fund value each year
Annual management charges for HSBC tracker funds – 0.25%
Annual management charges for other funds vary and trail commission of 0.5% is generally available.
Fund switches – all free
Am going back to CommShare to confirm BlackRock trackers offered are the institutional class – if so can avoid spread on these with HL.
The BlackRock Gilts tracker has disappeared from HL. Now no way to track gilts without paying the platform fee.
Also I see that up to 95% of the BR tracker funds can be lent out. This is higher than most other funds. Is this OK?
Great website BTW. Thanks very much for producing it.
@ William – are you referring to the Skandia CIA? Looking at the fund list, they only seem to offer the institutional BlackRock D class tracker for emerging markets: http://www.commshare.com/skandia/pdf/Skandia_FL.pdf
Do you know if there’s a minimum investment amount required for the D-class? This can be the case on other platforms.
Let us know if Commshare confirm the availability of the other D class trackers.
@ Ben – Unit Trusts have a bid-offer spread and OEICs don’t. Although apparently the price of OEICs contains a hidden bid-offer spread. Certainly most of the BlackRock trackers are Unit Trusts. I hesitate to say all because there’s usually an exception out there waiting to trip me up.
Incidentally, HL have just listed their first Vanguard funds. They’ve put up a couple of the gilt funds: http://www.hl.co.uk/funds/index-tracker-funds/view-index-tracker-funds
@ Neil – I’m not familiar with either of those funds but will try to get around to looking at them.
@ Jonny – there is a justification in your diversification of provider concerns. It’s a question of how much complexity you can stand though. While TER is important, tracking error/difference comes into play too: http://monevator.com/2011/01/25/choosing-a-tracker-using-tracking-difference/
@ Jay – I don’t know if 95% is high. It’s a good idea for an article though.
@ Jay – I’ve just discovered Hargreaves Lansdown now offer a decent snapshot of index funds that can be ranked by stock lending %. 95% looks high: http://www.hl.co.uk/funds/index-tracker-funds/view-index-tracker-funds?tsort=company
Change the view to stock lending