Looking at funds, during a period when fund charge data became more accessible than ever – via a burgeoning array of platform, performance analysis and comparison websites – the average fee for actively-managed strategies rose, rather than fell.
A decade of rising fees
Ed Moisson, head of UK and cross-border research at Lipper, has produced data showing that, of the 132 equity funds that altered their AMCs between 2000 and 2010, more than 90% increased them.
The average AMC for equity funds grew in almost every year during the period, pushing up TERs by a similar amount. Lipper estimates that TERs hit an average of 1.7% last year, more than 10% higher than in 2000.
Rising fees are in part the result of active managers’ ability to market themselves on skill, unlike passive products such as ETFs.
But while active managers may be under little pressure to cut their AMCs, innovative new players in the market are calling for better disclosure of costs not encompassed by the TER. Low-cost operators TCF Investments and SCM Private, both of which run fund of tracker fund portfolios, and Fundsmith, which offers a concentrated global portfolio of long-term equity holdings, have been particularly vocal in demanding greater transparency, focusing on what they say are “hidden” dealing expenses. SCM, which unveiled the “True and Fair” campaign in January, estimates that such costs amount to £2.7bn each year for UK retail funds, and £18.5bn across the UK savings and investment industry.
At the fund level, research suggests strategies that turn over their portfolios once each year incur transaction costs of about 1%.
However, a Which? Money study last November of 42 funds in the IMA UK All Companies sector indicated that the impact may be far lower. Of the ten UK equity funds with the highest annual charges after dealing costs were taken into account, portfolios with turnover rates between 200% and 400% typically increased their overall costs by less than one percentage point.
A hoped-for decade of rising value
Nevertheless, the IMA announced in June that it would consult its members on improving the disclosure of fund charges and transaction costs. Finalised guidance is expected this month, and will be based on IMA proposals which seek to build on the rules already in place for Ucits funds under the Key Investor Information Documents (KIID) regime, a key pillar of the pan-European Ucits IV directive.
On top of the KIID requirements, the IMA recommends that members should improve their disclosure of dealing costs, in the form of three-year average figures for broker commissions and transfer taxes, as a percentage of NAV.
In the closed-ended universe, investment trusts will also be required to produce KIIDs, under proposed Packaged Retail Investment Products (PRIPs) rules. Trade body the AIC says it supports enhanced disclosure of transaction costs, and is “closely observing” the IMA consultation before considering making recommendations of its own.
The key will be to ensure that if fees do fall, the capabilities of fund managers are unaffected.
