Fat-cat pension fund managers 'charging vast fees for nothing': £109bn of funds that are supposed to be 'actively' managed do little more than track the stock market

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Fat-cat fund managers are raking in huge sums while returning little to their customers, a report said yesterday.

The City watchdog said profit margins in the £7trillion industry averaged 36 per cent, inflated by hefty fees.

It identified £109billion of pension and investment funds that were supposed to be 'actively' managed but did little more than track the stock market.

The Financial Conduct Authority identified £109billion of pension and investment funds that were supposed to be 'actively' managed but did little more than track the stock market

These funds charge more than 'passive' rivals that mirror the markets, without managerial intervention.

The Financial Conduct Authority said there was no clear evidence that higher-charging funds delivered better results. They did however cost investors thousands in fees.

Around nine in ten active funds underperformed the stock market last year, according to ratings agency S&P.

The FCA said there was little competition on price and firms were not being transparent enough about charges and the performance of their funds.

It said it wanted firms to spell out to savers exactly how much they were paying – in percentage terms and in pounds and pence.

From next year, they will have to disclose a single 'all-in' charge to customers. This follows an edict from Brussels. 'The asset management sector is important to the economy, managing the savings of millions of people and in the current low interest environment it's vital we help people earn a return on their savings,' said Andrew Bailey, chief executive of the FCA.

Around 11million savers have investment products such as share ISAs. Active funds typically charge around between 0.75 to 0.85 per cent, around eight times a typical tracker fund.

Someone who invested £50,000 over 20 years would be almost £21,000 worse off in an active fund than a tracker, assuming the same growth, according to analysis from Candid Financial Advice.

Its founder Justin Modray said the FCA had not gone far enough.

'Fund managers have been laughing all the way to the bank at the expense of their customers for years and the report is unlikely to change that,' he said.

'The key problem is that investors take the lion's share of risk while fund managers enjoy a high profit margin, so why would fund managers change their behaviour unless forced?

'The FCA's proposed solution of a few minor tweaks and hoping fund managers start to compete on price is unrealistic. It's a shame as the FCA has wasted a golden opportunity to help investors get a fairer deal.'

James Daley of the Fairer Finance campaign said: 'The little guy has been getting ripped off for years. Changes are long overdue. More transparency will hopefully draw attention to the fees and make it harder for companies to justify them.'

Prudential recently came under fire after it emerged that one of its fund managers, Richard Woolnough, was paid £33million in two years.

The biggest fund he runs is M&G Optimal Income, which is worth £18.5billion and generated around £171million in fees last year.

Despite having a strong record over the longer term, over the past three years it has ranked only 39th out of 75 funds in its sector.

A spokesman for Prudential defended the fund, saying it was the third best in its class.

He added: 'A £100 investment made at launch would now be worth £216.25 net of fees versus the strategic bond sector average of £166.06 over the same period.'

Chris Cummings, chief executive of the Investment Association, said it supported the FCA's plans.

He said: 'Our industry looks after pensions and investments for millions of UK households, helping them to lead more prosperous lives into retirement. With this role comes significant responsibility.

'We strongly support the FCA's objective of ensuring our industry serves its customers in a competitive, accountable and transparent manner.'