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JP Morgan UK Active Index Plus

Investment Fund (Unit Trust)
Published 28 February 2011
Helpful? 13
Open Quote Only worthwhile if the manager consistently beats the index and too little evidence so far to judge whether this is likely.End Quote
Thumbs Up
  • Low cost for active fund management.
  • Risk controls should avoid major underperformance.
Thumbs Down
  • Manager's influence limited - only small bets versus the index.
  • Manager has little track record as yet.
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0.4% TER




Performance fee (10% of returns in excess of index) capped at 0.15% a year.

When you buy an actively managed UK stockmarket fund your goal should almost always be to beat the index, for example the FTSE All Share. The trouble is, many such funds charge 1.5% or more in annual fees and fail to deliver. The alternative is low cost tracking funds, but then you're unlikely to ever beat the index after charges.

JP Morgan appears to be trying to plug the gap, if there is one, with its new UK Active Index Plus fund (by renaming its existing UK Active 350 fund on 1 February 2011 and revising charges and investment strategy etc).

The idea is simple - offer a low cost fund that generally tracks the FTSE All Share Index but let an active manager make a few tweaks here and there to try and beat it.

Let's start with the charges. The annual management charge is 0.25% but other costs push total annual costs (as measured by the total expense ratio - TER) to 0.4%. There is also a performance fee calculated as 10% of returns above the index, but this is capped at 0.15% a year so the TER can't exceed 0.55%.

The 0.4% annual charge is a bit more expensive than the cheapest FTSE All Share trackers, which are available with TERs of 0.3% or less these days, but very low compared to the typical 1.5% actively managed charge.

The performance fee doesn't have a 'high watermark', which means you could end up paying it even if the fund is losing you money (but falling by less than the index). However, you won't pay a performance fee if the manager is simply 'clawing back' earlier periods of underperformance versus the index.

JP Morgan's aim is for the fund to have a 1% - 1.5% tracking error - that is to perform up to 1.5% better or worse than the FTSE All Share each year. It looks as though the manager is trying to achieve this by more or less tracking the FTSE All Share but increasing/decreasing exposure to some companies/sectors in an attempt to beat it.

At the time of writing the fund's factsheet suggests around 5% of the fund is held in cash and a 2.7% underweight position in the financial sector versus the index. Otherwise the variances look minor.

All told, this fund looks little different to quite a few so-called 'closet trackers' in the UK All Companies sector (i.e. funds where the manager takes only small bets against the index). The key difference being this fund is not trying to get away with steep 'active management' charges.

So is the JPM UK Active Index Plus fund a good idea?

The answer boils down to whether the manager, Michael Barakos, can consistently beat the index. If he can then this fund will prove great value, even after the performance fee. If he can't then the fund will end up little more than a slightly overpriced tracker or, more worryingly, a 'dog' if his bets against the index mostly backfire.

However, judging Michael Barakos's abilities is difficult as he currently has little track record of managing investment funds. And JP Morgan's generally indifferent track record of running funds in the UK All Companies sector doesn't fill me with confidence.

Overall I think JP Morgan deserves credit for trying to bring down the costs of active fund management. But the manager's bets against the index will be small and as he's yet to demonstrate he can consistently beat the index using this technique I'd be more inclined to opt for a low cost FTSE All Share tracker fund instead. Nevertheless, this is one to watch and I'd welcome similar fund launches with more proven managers at the helm.

Web Link: http://www.jpmorganassetmanagement.co.uk/AssetManager/

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