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Cash funds that lose money

By Ian Millward, published 13 June 2017.

Would you like invest in a fund that is almost guaranteed to lose you money whilst earning the fund provider millions?

Of course, you wouldn’t. Even the worst investments tend to be promoted on the expectation of making money. But I’m talking about a type of fund that in the current climate can only go down, because of the fees you are paying.

Welcome to Money Market (Cash) funds.

This is something that Jack and I came across first hand recently. A new enquiry wanted to review his two old pensions (with Friends Life and Standard Life) and obtain access to low cost ongoing financial advice. He runs his own limited company and only had a couple of weeks before the end of the company financial year, so he was under pressure from his accountant to make a quick employer contribution.

Our view was that he wasn’t giving himself long enough to make a good decision so we suggested investigating parking the money in one of the current pensions as a short-term measure. Which in turn led us to look at the Money Market funds on offer.

Nearly every life office runs a Money Market fund. It’s intended to be a close equivalent of putting your money in a savings account. It is a fund like any other but instead of buying, say shares, the fund manager buys cash, certificates of deposits or near cash equivalents.

The idea is simple. Shop around and earn your fee by finding attractive rates. Which is great when base rates are a few percent or more. But when base rates are 0.25% p.a. there is only so much a manager can do. Even if you do a great job and find rates that are 50% above the prevailing base rate, you have only added 0.125% to the return. Every little helps and all that, but here’s the rub. Annual fund manager fees are typically between 0.5% - 1.0%, in other words, two to four times higher than base rates.

So what of the Life Offices: cynical or asleep at the wheel? Our view is probably both. Why change when you earn handsomely not to!

We do try and do our bit at Candid. Jack and I mentioned this to Justin who did his thing and spoke to the Sunday Times who in turn covered it as a story last weekend. We know it won’t stop this sharp practice, but it will hopefully make more investors aware – which makes us feel a bit better about things.