You may remember an article I did eight months ago regarding mirrored funds. Before you switch off thinking this doesn’t apply to you and sounds complicated, don’t, because it probably does apply, and I will try and make it easier to understand.
When you invest within a pension fund or an investment bond you are offered a range of funds to choose from. Often they are simply an array of in house funds which are at best average. Beyond that, you may also be offered a range of ‘external’ funds. This refers to the option of accessing the better external managers such as Invesco, Jupiter, Neptune etc, as opposed to using the rather antiquated insurance company funds with the turning speed of a large ship… after it had sunk.
Such funds are very large and find it difficult to outperform as they have such enormous holdings in certain stocks and can’t really turn them round quickly, hence the underperformance.
Retirement is a long way off and it’s as interesting as chewing cardboard, so it’s easy to see why many of us can be guilty of apathy i.e. it’s easy to forget about it and hope it will be fine in the end.
Is this really a good idea? The average fund manager doesn’t hang around for long so is it a good strategy to hang on to the same fund for near 40 years in a pension?
In an attempt to remedy this, many look to the external managers as above to gain the best returns. What most don’t understand is that they rarely get the real fund they believe they are.
In an attempt to save costs perhaps, ‘mirrored’ versions of the funds are chosen instead. Whilst you may believe you are investing into Fidelity special situations for example, you may be invested into a mutated version. It will normally have the name of the company at the front of the fund i.e. AIG life Special situations.
AIG was the example I had previously used where I had analysed that an investment into Fidelity special situations direct would have meant you were over 33% better off than going to the mutated version (mirror fund).
Those who are most likely to be invested in a mirror fund are investors who have bought an onshore bond, and the very interesting thing about this is that most investments I see that are placed by some of the banks are in investment bonds!
I did a similar article to this one for FT Adviser some months ago and a number of advisers became a little miffed by the column stating that they didn’t use such arrangements but went on to explain what they did use.
Unfortunately they didn’t realise that the plans they were referring to were indeed mirror funds. They had actually no idea they were investing into such arrangements. If they don’t know what chance has the customer?
Let’s look closely at the numbers. Can you really imagine the difference in an investment after 40 years where the difference after three years is over 33%? Imagine the size of a pension fund by the time you are at retirement. Think about the difference this return will make. It would be colossal.
If you have a pension fund or investment bond it would be well worth your time talking to the company and getting them to confirm in writing that you are not in a mirror fund and that you are indeed in the actual retail fund itself.
In any event if you are invested into an investment bond you should also be reviewing its suitability as the recent budget nailed the coffin shut in terms of their ongoing competitiveness in terms of tax efficiency – not that they were ever tax efficient.
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