Active equity funds still charging too much despite 15% drop in annual fees in four years

Fees on active equity funds have dropped by 15% over the past four years but are still “unjustifiably high”.  

Analysis by Fundcalibre found the average ongoing charges figure (OCF) for actively managed equity funds has fallen from 1.13% in 2017 to 0.95% this year. Using data from FE Fundinfo it also found the average annual cost of a newly launched equity fund has dipped to 0.85%. 

“We’re really pleased to see that the UK fund industry has reacted to the passive threat by cutting fees,” says Darius McDermott, managing director of Fundcalibre.“The annual costs for investors are now substantially lower than they were even four years ago.  

“More and more managers are now passing on economies of scale to investors. Importantly, they are doing so on some of their most popular and best performing funds.” 

Baillie Gifford, Matthews Asia, Nomura and M&G are just some of the fund groups that have introduced sweeping fee cuts. 

Baillie Gifford remains an ‘outlier’ among fund groups that have ‘unjustifiably high fees’ 

In the case of Baillie Gifford, McDermott said the combination of stellar performance and fee cuts “is really putting the pressure on their competitors to respond”. 

The active Edinburgh manager has cut fees across its funds and trusts over a dozen times since 2013, including the Edinburgh Worldwide Investment Trust, Scottish Mortgage and the Pacific Horizon trust, the latter two which returned over 100% in 2020. 

The £6.8bn American fund, which has an OCF of 0.51% was the strongest performer of the entire Investment Association universe in 2020, returning 121.8%, while its £4.1bn Long Term Global Growth and £2.4bn Positive Change funds, which charge 0.64% and 0.53% respectively, were also in the top 10.   

But AJ Bell head of active portfolios Ryan Hughes says Baillie Gifford remains an “outlier” in a market where too many groups are charging “unjustifiably high fees” compared to their passive equivalents. 

Last year’s value for money assessments shone a spotlight on fees, prompting many fund groups to transfer thousands of shareholders languishing in more expensive pre-RDR share classes into cheaper options.

“While the first year of the value assessments was essentially a free pass, it will become harder for managers to keep saying their funds are good value for investors as time progresses and I hope that we finally start seeing some widespread action to reduce the cost of active management rather than the odd, isolated case,” Hughes adds.

1% is still a huge proportion of assets to be giving up each year 

“Fund houses are finally realising that the game is up,” says Robin Powell, editor of The Evidence-Based Investor.  

“A simple Google search will tell you that only a tiny fraction of funds beat their benchmarks after costs in the long run. Simple market forces demanded that fees had to fall.” 

Powell believes there is “plenty of scope” for charges to fall even further. He says paying 1% is still a “huge proportion of assets to be giving up each year” especially considering index funds and ETFs are four or five times cheaper and some charge single-figure basis points. 

“Who in their right mind would spend four, five or even 10 times more than they need to on a car or house or on a pint of milk or loaf of bread?” 

The 1% fee doesn’t include transaction costs, which when added to the OCF mean active investors could be paying as much as 2%, Powell adds.  

“Just do the maths. Say you invest £10,000. Over a 10-year period, if you’re making 5% a year, you’ll make nearly an extra £6,300. But if fees and charges reduce your annual return to 3%, you’ll only make around £3,400. In other words, you’re giving away nearly half of your performance to fund managers, stockbrokers and other third parties. It’s bonkers.” 

2020’s worst performers charging between 0.75% and 2.15%

The worst performing Oeics last year had charges ranging from 0.75% to as much as 2.15%, according to data from FE Fundinfo. 

Energy funds which suffered due to the collapsing oil price in the pandemic racked up even higher losses due to their comparatively higher charges, as did Latam funds with HSBC Brazil Equity on an eye-watering OCF of 2.15%. 

Hedge fund AQR Style Premia has an OCF of just 0.75% but also has a 10% performance fee contingent on it beating its benchmark, the ML 3 Month Treasury Bill Index.  

Source: FE Fundinfo
 

Absolute Return funds lagging behind on charges 

Fees in the Targeted Absolute Return sector have remained stubbornly high, according to McDermott. 

“The sector as a whole has generally delivered very weak returns and a large part of that is the high fees they charge,” he says. “Often 1% annual management charge, plus a 20% performance fee is not acceptable for a 3% or 4% annual return.” 

The sector was particularly hard hit by the pandemic. According to data from FE Fundinfo, 88 out of 119 funds in the IA Targeted Absolute Return sector delivered losses in Q1 of 2020, compared with just 23 that generated a positive return. The sector saw outflows of £3.7bn in 2020, according to IA data. 

McDermott adds: “If the sector wants to stay relevant and remain part of investors allocations it needs to respond.”