Rising fund fees prove costly for investors
Annual charges can wipe millions off your investment. But there are ways to pay less, says James Daley
Saturday 14 June 2008
The cost of chasing good investment returns has been slowly creeping up over the past few years, as fund managers have slowly nudged up the fees they take for managing your money.
According to new research carried out by financial consultants Defaqto, on behalf of The Independent, the average unit trust or open-ended investment company (Oeic) now charges an annual fee of 1.37 per cent – compared to an average of just 1.23 per cent at the end of the 1990s.
Worse still, since a relaxation in the regulations a couple of years ago, more funds are starting to charge performance fees, which quickly ratchet up the cost of investing. It's now all too common for new funds to levy an annual management charge (AMC) of 1.75 per cent, as well as skimming off a further 20 per cent of all returns above a certain benchmark.
New Star Asset Management's Heart of Africa fund, which was launched earlier this year, is a fund that follows just this pattern – taking an AMC of 1.75 per cent, and then 20 per cent of everything the fund makes once it has achieved 3 per cent above LIBOR (the inter-bank cash lending rate). With three-month LIBOR currently standing at just under 6 per cent, this means that once the New Star fund has returned more than 9 per cent a year, it takes £1 of every £5 it makes you. On a good year, this sends the total charges bill through the roof.
Black Rock's Absolute Alpha fund is another fund that uses a similar charging structure, while RAB Capital uses performance fees across its entire fund range.
Fraser Donaldson of Defaqto says that the argument in favour of performance fees is that they "align the goals of both client and fund manager". However, Mark Dampier, the head of research for research for Hargreaves Lansdown, the stockbroker and financial advisers, points out that managers should already be incentivised to perform well by their annual bonuses, and also by the responsibility of knowing that they're looking after millions of pounds of private investors' hard-earned savings.
"When I first started in the industry, in the early Eighties, the average management fees were around 0.75 per cent a year," he says. "Obviously, the industry's changed a lot since then, and funds are much bigger, but I do feel now you're now paying more for what you used to get for less."
For the moment, performance fees are thankfully still relatively rare in the open-ended fund universe, but even those funds which don't use performance fees are edging up their charges. According to Defaqto, some 7 per cent of funds now have an AMC of 1.75 per cent or more, compared to just 2 per cent of funds nine years ago. Similarly, 59 per cent of funds now have an AMC of between 1.5 and 1.74 per cent, compared to 50 per cent in 1999.
Worse still, the annual management fees are not all that investors have to contend with. Most fund managers will try to charge investors an upfront fee of as much as 5.5 per cent when they make their initial investment – though this can usually be avoided if you buy through a discount broker or fund supermarket. However, even the AMCs are not all that they seem.
Fund managers will also take many of their day-to-day trading costs directly out of the fund. To get an idea of how much you are really being docked each year, it's better to look for a figure called the "Total Expense Ratio" (TER), which takes into account all these additional deductions as well. In some cases, the AMC can be quite low, but the TER will be much higher. Funds of funds are the worst offenders here. For example, Skandia's Global Best Ideas fund may only have an AMC of 1.5 per cent, but it has a TER of more than 2.4 per cent. But regular funds can also have high TERs. Jupiter's Emerging European Opportunities fund, for example, which invests in Russia and Eastern Europe has an AMC of 1.5 per cent, but a TER of almost 2 per cent.
The good news is, there are still some funds with lower charges out there. For example, Aegon's UK equity fund, which has almost doubled investors' money over the past five years, has an AMC of just 1.25 per cent and a TER of 1.4 per cent. Better still is the Fidelity Moneybuilder Growth fund, which has returned over 90 per cent over the past five years and has an AMC of 1 per cent and a TER of less than 1.2 per cent. Many investment trusts are also much cheaper than Oeics and unit trusts.
If you're opting for a lower-risk, lower-return product, finding a fund that doesn't charge too much is crucial. For example, if you invested £10,000 in a fund that returned 7 per cent a year for 10 years, and charged you a 1.5 per cent AMC, you'd end up almost £900 worse off than being in a fund with the same return and a 1 per cent AMC.
Although the very best managers tend to justify their higher fees – producing returns well above their benchmark – it's still possible to pay less than the headline rate for some of the top names. For example, discount brokers such as Cavendish (www.cavendishonline.co.uk) will refund you 0.5 per cent of the AMC on most funds, taking just £10 a year for themselves. Hargreaves Lansdown (www.h-l.co.uk) will also discount up to 0.25 per cent of the AMC.
If you want to pay even less for your fund, tracker funds, which simply mirror an index, are the cheapest of the bunch. Liontrust's Top 100 fund, for example, which tracks the FTSE 100 index, has an AMC of just 0.295 per cent, and a TER of just 0.36 per cent.
For more information on fund charges, visit the IMA's website (www.investmentuk.org), where the Find a Fund tool allows you to compare funds by their TER. Or for investment trusts, visit www.theaic.co.uk. Alternatively, for a look at fund performance, visit www.trustnet.com.
Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk
Kate Hudson's online sports brand Fabletics drains your account if you don't say 'stop'
Bargain Hunter: Exclusive discount on a SmartGlider - a self-balancing electric scooter
Get switched on to phone, internet and TV packages
My Tinder date asked for a refund when I declined a second meet up
10 tips for taking out a personal loan
- 1 More than 11,000 Icelanders offer to house Syrian refugees to help European crisis
- 2 President Obama comments on Humans of New York photo from Iran
- 3 If these extraordinarily powerful images of a dead Syrian child washed up on a beach don't change Europe's attitude to refugees, what will?
- 4 The Chinese city where men have 'three girlfriends because there are so many women'
- 5 German police forced to ask public to stop bringing donations for refugees arriving by train
Senior British politicians tell David Cameron: When dead children are being washed up on beaches – it's time to act
Britain to take more refugees as Cameron bows to pressure after more than 200,000 back our campaign
Jeremy Corbyn calls Osama bin Laden's killing a 'tragedy' - but was it taken out of context?
If these extraordinarily powerful images of a dead Syrian child washed up on a beach don't change Europe's attitude to refugees, what will?
If you're not already angry about the refugee crisis, here's a history lesson to remind you why you really should be
Theresa May says migrants should be banned from entering the UK unless they have jobs lined up
iJobs Money & Business
£20000 - £40000 per annum + OTE + Incentives + Benefits: SThree: Established f...
£20000 - £25000 per annum + OTE 40/45k + INCENTIVES + BENEFITS: SThree: The su...
£14000 - £16000 per annum: Recruitment Genius: This company was established in...
£20000 - £25000 per annum + OTE 40k: SThree: SThree are a global FTSE 250 busi...
Day In a Page
In an elevated position above the bay, this four-bedroom home offers sea and headland views. There is a decked balcony and sun terrace - plus coastal walks on the doorstep.
With four bedrooms, this spacious maisonette in a mid-terrace period-style house in Holland Road is well-maintained and offers high ceilings and period features.
The terraces of this two-bedroom penthouse apartment offer panoramic views that stretch over fifty miles from the cliffs of Beachy Head.
In the heart of the coastal village of Mumbles and moments from the pier, this five-bedroom Victorian terrace is set over three floors and retains many original features.
In a sandbanks location, moments from the beach, this three-bedroom apartment has a large open-plan living area and a south-west facing balcony.
This four-bedroom home has an annexe accessed from the side of the house, with potential for improvement and conversion subject to the necessary permissions.
In the heart of the hamlet of Wardley, this five-bedroom period home offers countryside views and a stylish interior, with original features and open fireplaces.
Offering countryside views and landscaped gardens, this three-bedroom Grade II-listed lodge has a spacious conservatory and a large cellar that could serve as a workshop.
Set in approximately 1.5 acres, this four-bedroom home comes with a second, detached property that's currently used as an annexe.
In the hamlet of Newchurch, this former parish church is now a four-bedroom home complete with clock tower and eyrie.
Offering scenic views from a large balcony and sun terrace, this four-bedroom home has a wraparound garden and a heated swimming pool.
Offering views across the Humber and East Yorkshire Wolds from a glass panelled balcony, this four-bedroom barn-style home befits a life of leisure.
This four-bedroom home offers versatile accommodation with annexe potential; features include a hot tub, sauna and Norwegian BBQ hut.
Well-located for schools, colleges and the town centre, this contemporary thatched cottage offers flexible living space with six bedrooms.
Built in 1907, this four-bedroom Edwardian period home has been refurbished by the current owners, retaining many original period features.
Surrounded by landscaped gardens, this five-bedroom home offers living space across three floors.
This lovely country home in Burnham Market is currently run as a popular holiday cottage, with five en suite bedrooms and colourful gardens.
This three-bedroom 17th-century former village bakery is just a few miles from the East Sussex coast.
Set on a landscaped plot, this light and airy four-bedroom home comes with a log burner in the lounge, a fitted kitchen and an open-plan ground-floor layout.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Built on a former chapel site, this impressive four-bedroom home boasts balconies, stunning views and contemporary modern living.
This three-bedroom house is situated in a quiet mews and set over three floors. Features include glazed staircases and high ceilings.
A period townhouse set over four floors, this five-bedroom home was built in the 18th Century and retains many original features.
With five bedrooms, this spacious home offers beautiful gardens and modern interiors - set within the popular market town of Bingley.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
In the pretty market town of Bungay, this grade II-listed Mill House is arranged over four floors, offering four bedrooms and three reception areas.
This first-floor flat comes with two bedrooms, an impressive open-plan reception room and two lovely roof terraces.
This five-bedroom home comes with a range of outbuildings including a large barn which could be converted into a self-contained granny-flat or rental.
Moored at Taggs Island and reached via a pretty garden, this two-bedroom houseboat has a vaulted reception room and skylit garden studio - currently a beauty salon.
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
A contemporary house spread over three storeys, this three-bedroom detached home has large sliding doors that open out to the River Quaggy.
Moored in Chelsea's Cheyne Walk, this houseboat offers two double bedrooms and a teak deck that's ideal for al-fresco dining.
This former village bakery, dating back to the 17th century, is now a three-bedroom detached home just a few miles from the East Sussex coast.
On the picturesque Isle of Man, this four-bedroom character home has a ground-floor shop that's currently run as a newsagents and a flat that would make an ideal holiday let.
In a new collection of flats, this first-floor two-bedroom apartment offers ample entertaining space and a prime view of Furze Green from a private balcony.
This three-bedroom stone-built cottage currently trades as the village store with a restaurant in the annexe and family accommodation on the upper floors.
Previously two semi-detached properties, this five-bedroom home is spread over three floors with a large breakfast kitchen, orangery, office and gym on the second floor.
This five-bedroom home enjoys countryside views over the Blyth estuary to Southwold, offering flexible living space with a ground-floor annexe - ideal for use as a holiday let.
Close to the market town of Eye, this four-bedroom detached home offers a double-height living room which takes the place of the original, 19th-century, chapel nave.
Dating back to the 19th century, this four-bedroom home needs modernising. Spanning three storeys, the red-brick house has a fireplace, a small terrace and a cellar.
Just outside of Cambridge, this single-storey home offers three double bedrooms, a living room with vaulted timber ceiling and ladder steps that lead to a mezzanine study area.
This six-bedroom Georgian home is on three floors with open fireplaces, a two oven Aga, an annexe, and cottage gardens with outbuildings and a car barn.
A former coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, an attached office, kennels and an outbuilding that's currently used as a gym.
Located beside an impressive Victorian viaduct, this four-bedroom home has an open-plan living area that is glazed on two sides, with skylights and high ceilings.
A former furniture workshop, this three-bedroom home has high ceilings and painted brick walls, in a village setting only fifteen miles from the coast.
This five-bedroom stone townhouse features a pine staircase and an Inglenuk fireplace, double doors from the lounge give access to an enclosed courtyard.
This five-bedroom, detached home blends traditional and modern design; the sleek kitchen features a gas hob and oven set within an exposed chimney breast.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B or countryside retreat, subject to change of use permissions.