Mirror mirror on the wall whos the fairest pension of them all

Some personal pension ‘mirror funds’ provide an unflattering likeness of the real thing warns Bestinvest

• 71% of mirror funds analysed delivered a worse 10-year return that the unit trusts / OEICs they aimed to replicate and furthermore, when it came to equity strategies, some 93% delivered worse returns
• 'Pension Mirror Funds: A critical reflection' is available for readers to download for free at bestinvest.co.uk/pension-mirror-funds

Leading investment and financial planning group Bestinvest will this week launch a new report that highlights the pale imitation that many so-called personal pension ‘mirror funds’ provide of the underlying unit trusts and OEICs they seek to replicate, potentially resulting in much lower long term returns for pension investors.< /p>

Over the last decade many of the UK’s leading life and pension firms have extended the range of fund choice in their plans beyond the range of funds they manage in-house, to include versions of popular unit trust and OEIC funds managed by external asset managers. These unit-linked funds carry both the name of the pension provider and the underlying fund and seek to “mirror” the performance of the underlying unit trust or OEIC. Investors will therefore assume that they can choose the same funds that they might hold in their Individuals Savings Accounts.

However, the Bestinvest report highlights the fact that differences in charging structures and cash levels within pension mirror-funds can result in surprisingly different long-term returns compared to the underlying funds managed by these fund managers.

To illustrate the issue, Bestinvest has highlighted examples of five widely held funds that it rates highly, each of which have attracted over a billion of assets into their underlying OEIC and unit trust funds and then compared the long-term returns against mirror-versions of the same funds.

For example, the guide highlights the hugely successful £4.8 billion AXA Framlington UK Select fund, managed by veteran stock picking Nigel Thomas. While the underlying fund, which is widely held by ISA investors, has delivered a 10 year total return of 202%, six of the eight mirror versions have provided a lower return with the worst delivering a 173% total return meaning an investor with a £10,000 investment could have ended up as much as £2,900 worse off.

The guide provides further examples of the disparity in returns provided by examining mirrors of the Artemis Income, Fidelity South East Asia, M&G Corporate Bond and Schroder Tokyo funds. However, these are just a few examples; the vast majority of popular unit trusts are mirrored by pension funds and the same inconsistencies exist across them all.

David Smith, financial planning Director and pensions expert at Bestinvest, commented:

“When you invest in a pensions mirror fund, it may look and feel like you are getting a carbon copy of the underlying fund but the outcomes in return can be substantial compared to the ‘real thing’, with the results invariably poorer in the examples we looked at. We suspect many investors in these funds are unaware of the extent to which there are these disparities in performance.”

Smith added: “It is important to emphasise that there are many thousands of these mirror funds out there, often with several such funds for every OEIC or unit trust. While the examples we have provided are all for underlying funds we rate highly, if you hold a mirror fund based on an underlying ‘dog’ fund then potentially you are suffering a double-whammy of dismal performance.”

“In many cases investors may be better off investing directly in the underlying funds through a Self-Invested Personal Pension (SIPP). With a SIPP there is much greater transparency between admin and fund charges, coupled with a very wide range of choice.”

“SIPPs are also well positioned for the greater flexibility afforded by the Government’s pension reforms, such as the ability to draw down lump sums as and when required. In contrast, we expect many older personal pension contracts are unlikely to offer such flexibility.”

For a photograph of David Smith or to arrange an interview, please call Roisin Hynes on 020 7189 2403 or email roisin.hynes@bestinvest.co.uk

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About Bestinvest:

Founded in 1986, Bestinvest has grown to become a leading private client investment adviser, looking after £5 billion of assets. We offer a range of investment services from the Online Investment Service for self-directed investors to Investment Advisory and Investment Management services for clients who do not have the time or inclination to manage their own investments.

All of our services are underpinned by rigorous research aimed at identifying those fund managers we believe will deliver long-term superior performance. We also have a team of expert financial planners with nationwide coverage to help clients with their pensions, retirement or Inheritance Tax planning. At Bestinvest, we pride ourselves on offering the highest levels of professionalism and expertise with transparent, competitive prices. We are pleased that our greatest source of new business is from personal referrals from existing clients.

Bestinvest has won numerous awards including Stockbroker of the Year, Low-Cost Sipp Provider of the Year and Self-Select ISA Provider of the Year at The Investors Chronicle and Financial Times Investment Awards 2013. Bestinvest also won UK Wealth Manager of the Year 2013 and Best Wealth Manager for Investments at The Investors Chronicle and the Financial Times Wealth Management Awards 2013.

Headquartered in Mayfair, London, Bestinvest employs more than 200 staff and has an extensive network of regional offices. For further information, please visit: www.bestinvest.co.uk