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

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; request a free guide on NISAs from Hargreaves Lansdown

Arts and Entertainment
books
Voices
Caustic she may be, but Joan Rivers is a feminist hero, whether she likes it or not
voicesShe's an inspiration, whether she likes it or not, says Ellen E Jones
Arts and Entertainment
The Doctor and the Dalek meet
tvReview: Doctor Who Into the Dalek more than compensated for last week's nonsensical offering
Sport
Diego Costa
footballEverton 3 Chelsea 6: Diego Costa double has manager purring
PROMOTED VIDEO
Life and Style
3D printed bump keys can access almost any lock
techSoftware needs photo of lock and not much more
Arts and Entertainment
The 'three chords and the truth gal' performing at the Cornbury Music Festival, Oxford, earlier this summer
music... so how did she become country music's hottest new star?
Life and Style
The spy mistress-general: A lecturer in nutritional therapy in her modern life, Heather Rosa favours a Byzantine look topped off with a squid and a schooner
fashionEurope's biggest steampunk convention heads to Lincoln
News
Dr Alice Roberts in front of a
peopleAlice Roberts talks about her new book on evolution - and why her early TV work drew flak from (mostly male) colleagues
News
i100
Arts and Entertainment
Star turns: Montacute House
tv
News
i100Steve Carell selling chicken, Tina Fey selling saving accounts and Steve Colbert selling, um...
Arts and Entertainment
Unsettling perspective: Iraq gave Turner a subject and a voice (stock photo)
booksBrian Turner's new book goes back to the bloody battles he fought in Iraq
News
The Digicub app, for young fans
advertisingNSPCC 'extremely concerned'
News
i100
Arts and Entertainment
Some of the key words and phrases to remember
booksA user's guide to weasel words
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Law Costs

    Highly Attractive Salary: Austen Lloyd: BRISTOL - This is a very unusual law c...

    Network Engineer (CCNP, CCNA, Linux, OSPF, BGP, Multicast, WAN)

    £35000 per annum: Harrington Starr: Network Engineer (CCNP, CCNA, Linux, OSPF,...

    DevOps Engineer (Systems Administration, Linux, Shell, Bash)

    £50000 per annum: Harrington Starr: DevOps Engineer (Systems Administration, L...

    Data Scientist (SQL, PHP, RSPSS, CPLEX, SARS, AI) - London

    £60000 - £70000 per annum: Harrington Starr: A prestigious leading professiona...

    Day In a Page

    The other Mugabe who is lining up for the Zimbabwean presidency

    The other Mugabe who is lining up for the Zimbabwean presidency

    Wife of President Robert Mugabe appears to have her sights set on succeeding her husband
    The model of a gadget launch: Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed

    The model for a gadget launch

    Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed
    Alice Roberts: She's done pretty well, for a boffin without a beard

    She's done pretty well, for a boffin without a beard

    Alice Roberts talks about her new book on evolution - and why her early TV work drew flak from (mostly male) colleagues
    Get well soon, Joan Rivers - an inspiration, whether she likes it or not

    Get well soon, Joan Rivers

    She is awful. But she's also wonderful, not in spite of but because of the fact she's forever saying appalling things, argues Ellen E Jones
    Doctor Who Into the Dalek review: A classic sci-fi adventure with all the spectacle of a blockbuster

    A fresh take on an old foe

    Doctor Who Into the Dalek more than compensated for last week's nonsensical offering
    Fashion walks away from the celebrity runway show

    Fashion walks away from the celebrity runway show

    As the collections start, fashion editor Alexander Fury finds video and the internet are proving more attractive
    Meet the stars of TV's Wolf Hall... and it's not the cast of the Tudor trilogy

    Meet the stars of TV's Wolf Hall...

    ... and it's not the cast of the Tudor trilogy
    Weekend at the Asylum: Europe's biggest steampunk convention heads to Lincoln

    Europe's biggest steampunk convention

    Jake Wallis Simons discovers how Victorian ray guns and the martial art of biscuit dunking are precisely what the 21st century needs
    Don't swallow the tripe – a user's guide to weasel words

    Don't swallow the tripe – a user's guide to weasel words

    Lying is dangerous and unnecessary. A new book explains the strategies needed to avoid it. John Rentoul on the art of 'uncommunication'
    Daddy, who was Richard Attenborough? Was the beloved thespian the last of the cross-generation stars?

    Daddy, who was Richard Attenborough?

    The atomisation of culture means that few of those we regard as stars are universally loved any more, says DJ Taylor
    She's dark, sarcastic, and bashes life in Nowheresville ... so how did Kacey Musgraves become country music's hottest new star?

    Kacey Musgraves: Nashville's hottest new star

    The singer has two Grammys for her first album under her belt and her celebrity fans include Willie Nelson, Ryan Adams and Katy Perry
    American soldier-poet Brian Turner reveals the enduring turmoil that inspired his memoir

    Soldier-poet Brian Turner on his new memoir

    James Kidd meets the prize-winning writer, whose new memoir takes him back to the bloody battles he fought in Iraq
    Aston Villa vs Hull match preview: Villa were not surprised that Ron Vlaar was a World Cup star

    Villa were not surprised that Vlaar was a World Cup star

    Andi Weimann reveals just how good his Dutch teammate really is
    Bill Granger recipes: Our chef ekes out his holiday in Italy with divine, simple salads

    Bill Granger's simple Italian salads

    Our chef presents his own version of Italian dishes, taking in the flavours and produce that inspired him while he was in the country
    The Last Word: Tumbleweed through deserted stands and suites at Wembley

    The Last Word: Tumbleweed through deserted stands and suites at Wembley

    If supporters begin to close bank accounts, switch broadband suppliers or shun satellite sales, their voices will be heard. It’s time for revolution