Investors of popular funds are paying up to three times more than the ticketed prices once the additional fees are added, according new research.
The ongoing charges figure, known as OCF, has long been the industry standard measure of running costs.
But the trouble is, it was unclear exactly how much investors were being charged paying in transaction (also known as trading costs) as well as other one-off fees.
And new rules that have forced fund managers to disclose this have show how some are far more expensive than was previously claimed – eating into investors’ returns.
in a report published in July 2016, Investment Association condemned ‘hidden fees hysteria’ as the ‘Loch Ness Monster of investments’
Fund managers are now being forced to disclose these hidden costs on top of the OCF under new rules introduced on the start of 2018 under a European Union directive, Mifid II, short-form for the second Markets in Financial Instruments.
In short, these charges aren’t new, but they must now be declared by fund managers.
A study by by asset management consultancy firm The Lang Cat found that transaction fees charged by some popular UK funds are almost double the OCF.
The Janus Henderson UK Absolute Return fund has an OCF of 1.06 per cent and levies transaction charges of 79p for every £100 invested – the highest of the funds listed.
What’s more, the fund deducts 20 per cent of any returns in performance fees, which are set against the benchmark of the Bank of England Base rate – currently at 0.5 per cent.
However, the charge is subject to a high water mark – meaning investors would only pay the performance fee if the fund’s net profit exceeds its previous highest account value.
This prevents investors from paying a performance fee on bumper returns that follow periods of under-performance.
How some top funds claimed fees and actual fees compare. Source: The Lang Cat/ FE Analytics
Even tracker funds are not immune. The L&G Global Inflation Linked Bond Index fund has an OCF of 0.27 per cent but levies transaction fees of 0.22 per cent on top of that, giving an actual cost of ownership of 0.49 per cent. That may not sound like much but it is 81.48 per cent higher.
‘No-one’s charges have actually gone up,’ Mike Barrett, consulting director at the Lang Cat, said.
‘Investors have always been paying these fees, it’s just that the fund groups now have to tell you what they are charging.
“Most advisers have always known there was more to fund costs than the OCF; however, in the absence of formal disclosure this was just speculation, and they had to work with what the fund groups told them.’
Where to find the new fee details
Transaction fees are now displayed at the point of sale through your investment platform – or your financial adviser can tell you.
However, those who go direct to the fund management source are unlikely to find these cost on the pre-sale Key Investor Information Document (KIID) document until early next year.
This is because MiFID II only came into effect at the start of the year and the post-sale reporting needs to refer to the relevant periods starting after then.
The funds that don’t cost much more
At the other end of the scale, the Lindsell Train Global Equity fund charges just 0.01 per cent in transaction costs – with a difference in the actual cost of ownership of just 1.33 per cent.
Similarly, the OCF of Fundsmith Equity, which topped the bestseller lists of both the Bestinvest and AJ Bell DIY investment platforms, is not that far off its actual cost of ownership.
The former is levied at 1.05 per cent and the latter is 1.10 per cent. [Read our in-depth look at Fundsmith]
Meanwhile, the overall cost of investing in star fund manager Neil Woodford’s flagship equity income fund is 1.03 per cent, with an ongoing charges figure of 0.75 per cent and transaction costs adding 0.28 per cent. Woodford has disclosed the true cost of investing since April 2016.
Interestingly, seven of the 20 funds listed disclose their transaction costs as zero. However, it is unlikely these funds genuinely have no transaction costs, instead they could be being paid through company profits or already included within the ongoing charges cost.
‘The Loch Ness Monster of investments’
Investors have been frustrated for years that fuller information about costs is not available from the industry, with campaigners calling for more information.
Don’t forget investing platform fees
The cost of your investment is not just based on the fund itself, you will also have to pay for the platform on which you hold it.
DIY investing platforms tend to charge either a percentage amount, or a flat fee (the latter tending to be better for big pots).
For example, if you choose to invest in the L&G Global Inflation Fund through Hargreaves Lansdown, the UK’s largest online stockbroker, you’d have an additional 0.45 per cent platform charge. However, 0.1 per cent is knocked off the OCF by HL.
The all-in cost investment 0.84 per cent – which is over three times the initial amount.
However, in a report published in July 2016, the Investment Association branded ‘hidden fees hysteria’ the ‘Loch Ness Monster of investments‘. Indicating that the existence of harmful extra costs was mythical and hard to price.
The investment industry’s leading trade body claimed that fund performance over recent years is proof that costs aren’t hitting returns delivered to investors.
‘It turns out that Nessie is alive and well, and charging tourists a third more for a photo than they expected,’ Barrett said.
He added: ‘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.’
A spokesman for the Investment Association said: ‘The Investment Association fully supports transparency of costs and charges so customers understand what they are paying for, from the financial adviser or retail platform, to the fund.
This is now enshrined in law through MiFID II as of 3 January 2018.
‘However, the way the new methodology to calculate transaction costs was designed will confuse and mislead investors and could ultimately defeat the goal of greater transparency.
‘This was repeatedly raised by the industry throughout the law-making process, with sensible alternatives proposed that would meet the criteria for greater transparency in a way that didn’t confuse the end investor. Regulators must now listen to the numerous objections across the board and review this damaging methodology as soon as possible.’
These simple figures don’t show the full picture
Not everyone is entirely convinced by the comparison between ongoing charges and actual cost of ownership.
Ben Yearsley, director at Shore Financial Planning, said: ‘The problem with these type of tables is that they show no context. To the lay person, they look bad, as they may think they are being ripped off.
‘It would have been useful to have added portfolio turnover figures into the table for example, which would show if the manager is active in the market. It would have been interesting to see a FTSE 100 Tracker in the list for comparison purposes.
‘What it does show is that standardised reporting is essential so that investors can see the true cost of owning a fund. Transaction costs should be disclosed, but kept separate from the ongoing management fee and other fixed costs and reported retrospectively as a manager won’t know in advance the number of changes that will be made in a year.
‘Investors should question the cost of investing, both from a fund perspective and platform perspective and transparency is important. However, in my view you should not get too obsessed as what a fund is doing and how it performs are all part of the investing process as well as cost’
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