To illustrate this point, asset management consultant The Lang Cat lined up the top 20 selling funds of 2016 to look at the OCF and newly disclosed transaction fees to work out the total amount investors are actually being charged.
With the roll-out of Mifid II earlier this month, investment managers are now required to disclose all hidden transaction and trading charges. Previously, managers only had to list the OCF to clients and prospective buyers.
The difference between the OCF and the actual cost of ownership, after factoring in additional charges, is staggering. After transaction costs are included, many investors are paying almost double the OCF, according to the Lang Cat’s findings.
Across 13 of the 20 funds, investors were found to be paying on average at least 30%, and as much as 85%, more in additional transaction fees.
Neil Woodford’s flagship equity income fund, which was the worst performing fund in the Investment Association’s UK Equity Income sector last year, was found to be charging investors 37.33% more on top of its OCF of 75bps.
In his defence, Woodford has disclosed all extra costs on his website since April 2016. And Portfolio Adviser understands that the figure quoted by the Lang Cat represents the average transaction costs over three years. Since Woodford’s equity income vehicle was only launched three years ago, a time which saw significant inflows into the fund, this would have resulted in higher transaction costs. Over one year to 31 December 2017, the total cost of investing in the fund was 96bps, according to the latest fact sheet available on the manager’s own website.
The Henderson Absolute Return UK fund, Investec UK Alpha and L&G Global Inflation Linked Bond Index are among the funds with the biggest disparity between OCF and actual cost of ownership, ranging anywhere from 74.53% and 81.48% more than previously stated.
Of the top 20 funds, the £968m JPM Global Macro Opps fund has the biggest discrepancy between OCF and its actual cost (84.62%), with transaction costs adding another 66bps worth of charges to the total.
A spokesperson for JP Morgan Asset Management said the firm “is using the full Priips methodology for calculating transaction costs.”
“We support MIFID II’s intent to make it easier for investors to compare fees,” they continued. “JPM Global Macro Opportunities fund generated total return net of fees over one year to 31 December 2017 of 15.98%. Performance is first decile over one year and first quartile over three years in the IA Targeted Absolute Return Category. The fund’s ongoing charges are also in the lowest quartile in its peer group.”
Two funds from Vanguard’s low-cost, passive, multi-asset range – the LifeStrategy 60% Equity and LifeStrategy 40% Equity vehicles – are about 50% and 55% more expensive after factoring in 11bps and 12bps worth of hidden fees, respectively.
Seven of 2016’s most popular funds, including Nick Train’s Lindsell Train UK Equity fund, have disclosed their transaction costs as 0.00%, but the Lang Cat said, “it is unclear yet whether these funds genuinely have no transaction costs or whether they are being met from company profits rather than borne by the fund”.
The Lang Cat’s findings are hardly a revelation. As Mike Barrett, the firm’s consulting director, points out, “most advisers have always known there was more to fund costs than the OCF” but “in the absence of formal disclosure this was just speculation, and they had to work with what the fund groups told them”.
A real turn-off
At a time when the level of trust between investors and people in financial services is still not fully repaired from the global financial crisis and more attention than ever is being paid to fees and transparency, “this is likely to be a real turn-off”, said Barrett.
“This feeling of grubbiness intensifies when you remember just how hard the industry has kicked against being made to step up to the plate and disclose these charges,” he added. “This is not anything radical – all they are being asked to do is to tell people what it costs to invest with them.”
The next step is to press firms citing zero transaction costs to explain themselves to ensure a level playing field where all managers are out in the open, said Barrett.
“It’s taken EU regulation to get this out in the open, rather than transparency being the default position. Now we’ve come this far, we also need those firms who are disclosing a zero cost to explain the basis of their assumptions.”
Below is a table showing the total cost of investing, combining the previously disclosed OCF with the newly visible transaction costs, for the top 20 selling funds of 2016 (source: Fundscape).
