You reap what you sow, so what do investors get for all the charges?

Many people may pay a premium for their fund management but receive weak returns, reports Sam Shaw

The old adage goes that if you pay peanuts, you get monkeys. But what about when the opposite applies, when you pay a premium but are only given peanut-like returns?

In a low-interest-rate environment, where returns on cash deposits are pretty pathetic – and, if our new Bank of England governor is to be believed, will remain so for at least another three years – there are questions to be asked about where you should put your money, and what it should cost.

At one end of the funds world are hedge funds, and their close cousins, using sophisticated investment strategies, often called absolute return funds, or some such variation. Many of these have applied what are referred to as performance fees, where the manager sets a target and if they beat it, you pay them more. These can vary in amounts and are often pegged to Libor, the rate at which banks lend to one another.

But there are plenty more ifs, buts, and maybes to consider.

Most performance fees are subject to a "high water mark" – this means the fund must exceed a certain size, or the performance fee will not apply. A manager whose fund is haemorrhaging assets will not be rewarded with a performance-related fee until they return the fund to its former glory.

Also beware the timeframe to which the fee applies. This is known as a crystallisation period, and can be quite short. In a world that often insists on longer track records "in the job" in order to judge whether a fund manager is skilled or just lucky, and simultaneously encourages investors to take a longer investment horizon, a quarterly bonus structure seems rather contrary and fails to lock in the talent you're paying for.

Hargreaves Lansdown research director Mark Dampier agrees, adding: "I have no problem paying for performance. I just don't like the way these are structured. A good manager will take in assets and, due to the annual management charge (AMC), as the fund goes up in size, they will make more money anyway.

But, Mr Dampier suggests, those who can actually justify charging an additional fee for performance are few and far between.

"Martin Taylor's Eastern Europe fund at Thames River has slaughtered the competition so there are exceptions to the rule. If you wanted to cap the fund you might design a different fee structure because you will be turning away money, so in some respects a better manager could warrant paying more."

Star status

It makes sense; after all similar approaches exist across most industries; lawyers, surgeons, or even hairdressers – the more experience you bring, the more expensive your services. But what happens when they move on? Jupiter recently announced its intention to remove the performance fee on its Absolute Return fund, as outgoing star manager Philip Gibbs prepares to hand the reins. Jupiter said it was stripping the fee to bring the fund in line with the rest of its range (bar one), adding the fund should fare better in the competitive Absolute Return sector, as the AMC remains at 1.25 per cent.

"We do not believe the price is the most important factor to consider when choosing investments," says head of UK retail PR Despina Constantinides. "If a fund manager produces outperformance over the medium term after charges, it is worth paying more for him or her."

But Gina Miller, founding partner at SCM Private, who also launched the Trueandfaircalculator.com in a bid to expose so-called hidden charges on investment funds thinks many charges are out of touch.

Sidestep the costs

To avoid higher charges, many investors are turning to passive funds, which track an index, but a closer look shows these may be as guilty as the more active players.

Of the list of tracker funds available to UK investors, the AMCs varied widely. At the higher end sat funds from Legal & General (1.25 per cent), while Virgin and M&S posted AMCs of 1 per cent. While the Legal & General Global Environmental Enterprises fund ran against a bespoke benchmark run by a specialist partner firm, the Virgin and M&S products simply represented the FTSE All-Share and FTSE 100, respectively.

Most other UK trackers, also running against straightforward FTSE indices, held AMCs between just 0.07 per cent and 0.5 per cent.

"Cost is important but not the only consideration," argues Virgin Money PR manager Jule Wilson. "Smaller investment amounts are costlier to administer and we've opened up the market to a whole host of people who previously would have been excluded from investing in the stock market."

But Mr Dampier believes people often prefer buying into a brand rather than cost and performance: "If you were to go to one shop and buy a can of soup, then you found the same can of soup somewhere else for half the price, you'd do something about that. For some reason in financial services we don't apply the same logic."

Many investors are turning to exchange-traded products for their comparable returns but delivered at a fraction of the headline cost. But Dennis Hall, managing director at Yellowtail Financial Planning, thinks the underlying dealing costs are too high, a result of being able to trade throughout the day, outweighing any outperformance or cost savings.

On the flipside are those funds which market themselves as actively managed, meaning the manager takes a deliberate view on the stocks held in their portfolio with little regard for whether these reflect the broader index or not. Active funds tend to charge more for this, but many are quite close in make-up and performance to their benchmark indices. These can be called index-huggers, or closet-trackers.

Trueandfaircalculator.com looked at funds over £100m in the leading domestic fund sector, UK All Companies, and stacked up three comparable charges. It compared their stated AMC (fund manager charge), their ongoing charges (such as investment management and administration costs) and the True and Fair cost. This last calculation combines the AMC, adviser charge, fee for any administration tool, and that of any applicable tax wrapper.

Of the 10 most expensive by True and Fair cost, their average AMC was 1.55 per cent. Ongoing charges were averaged at 1.762 per cent and the True and Fair figure was 3.21 per cent, over twice the headline charge.

It falls to the investor to decide whether they pay peanuts or premiums.

Sport
Lionel Messi pictured after reaching the final
world cup 2014
Sport
Lionel Messi and Thomas Muller have shone brightest for Argentina and Germany respectively on their way to the World Cup final
Sport
Brazilian fans watch the match for third place between Brazil and Netherlands
Brazil 0 Netherlands 3: Dutch pile on the misery in third place playoff
Arts and Entertainment
TV The follow-up documentary that has got locals worried
PROMOTED VIDEO
Arts and Entertainment
'Deep Breath' is Peter Capaldi's first full-length adventure as the twelfth Doctor
TVFirst episode of new series has ended up on the internet
News
Ian Thorpe had Rio 2016 in his sights
people
Arts and Entertainment
Original Netflix series such as Orange Is The New Black are to benefit from a 'substantial' increase in investment
TVHoax announcement had caused outrage
Life and Style
Swimsuit, £245, by Agent Provocateur
fashion

Diving in at the deep end is no excuse for shirking the style stakes

News
Monkey business: Serkis is the king of the non-human character performance
peopleFirst Gollum, then King Kong - now the actor is swinging through trees in Dawn of the Planet of the Apes
Arts and Entertainment
Blackman: Landscape of children’s literature does not reflect the cultural diversity of young people
booksMalorie Blackman appeals for a better ethnic mix of authors and characters and the illustrator Quentin Blake comes to the rescue
News
One Direction star Harry Styles who says he has no plans to follow his pal Cara Delevingne down the catwalk.
peopleManagement confirms rumours singer is going it alone are false
Voices
Mrs Brown's Boy: D'Movie has been a huge commercial success
voicesWhen it comes to national stereotyping, the Irish know it can pay to play up to outsiders' expectations, says DJ Taylor
Arts and Entertainment
Curtain calls: Madani Younis
theatreMadani Younis wants the neighbourhood to follow his work as closely as his audiences do
Life and Style
Douglas McMaster says the food industry is ‘traumatised’
food + drinkSilo in Brighton will have just six staple dishes on the menu every day, including one meat option, one fish, one vegan, and one 'wild card'
Sport
Mario Balotelli, Divock Origi, Loic Remy, Wilfried Bony and Karim Benzema
transfersBony, Benzema and the other transfer targets
Life and Style
Once a month, waistline watcher Suran steps into a 3D body scanner that maps his body shape and records measurements with pinpoint accuracy
techFrom heart rates to happiness, there is little this fast-growing, self-tracking community won't monitor
News
Soft power: Matthew Barzun
peopleThe US Ambassador to London, Matthew Barzun, holds 'jeans and beer' gigs at his official residence. He says it's all part of the job
Sport
Joe Root and James Anderson celebrate their record-beaking partnership
cricketEngland's last-wicket stand against India rewrites the history books
Finacial products from our partners
Property search
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

    Information Security Manager (ISO 27001, Accreditation, ITIL)

    £70000 per annum: Harrington Starr: Information Security Manager (ISO 27001, A...

    Biztalk - outstanding opportunity

    £75000 - £85000 per annum + ex bens: Deerfoot IT Resources Limited: Biztalk Te...

    Trade Desk Specialist (FIX, Linux, Windows, Network Security)

    £60000 per annum: Harrington Starr: Trade Desk Specialist (FIX, Linux, Windows...

    Service Desk Analyst (Windows, Active Directory, ITIL, Reuter)

    £35000 per annum: Harrington Starr: Service Desk Analyst (Windows, Active Dire...

    Day In a Page

    Iraq crisis: How Saudi Arabia helped Isis take over the north of the country

    How Saudi Arabia helped Isis take over northern Iraq

    A speech by an ex-MI6 boss hints at a plan going back over a decade. In some areas, being Shia is akin to being a Jew in Nazi Germany, says Patrick Cockburn
    The evolution of Andy Serkis: First Gollum, then King Kong - now the actor is swinging through the trees in Dawn of the Planet of the Apes

    The evolution of Andy Serkis

    First Gollum, then King Kong - now the actor is swinging through the trees in Dawn of the Planet of the Apes
    You thought 'Benefits Street' was controversial: Follow-up documentary 'Immigrant Street' has got locals worried

    You thought 'Benefits Street' was controversial...

    Follow-up documentary 'Immigrant Street' has got locals worried
    Refugee children from Central America let down by Washington's high ideals

    Refugee children let down by Washington's high ideals

    Democrats and Republicans refuse to set aside their differences to cope with the influx of desperate Central Americas, says Rupert Cornwell
    Children's books are too white, says Laureate

    Children's books are too white, says Laureate

    Malorie Blackman appeals for a better ethnic mix of authors and characters and the illustrator Quentin Blake comes to the rescue
    Blackest is the new black: Scientists have developed a material so dark that you can't see it...

    Blackest is the new black

    Scientists have developed a material so dark that you can't see it...
    Matthew Barzun: America's diplomatic dude

    Matthew Barzun: America's diplomatic dude

    The US Ambassador to London holds 'jeans and beer' gigs at his official residence – it's all part of the job, he tells Chris Green
    Meet the Quantified Selfers: From heart rates to happiness, there is little this fast-growing, self-tracking community won't monitor

    Meet the 'Quantified Selfers'

    From heart rates to happiness, there is little this fast-growing, self-tracking community won't monitor
    Madani Younis: Five-star reviews are just the opening act for British theatre's first non-white artistic director

    Five-star reviews are just the opening act for British theatre's first non-white artistic director

    Madani Younis wants the neighbourhood to follow his work as closely as his audiences do
    Mrs Brown and her boys: are they having a laugh?

    Mrs Brown and her boys: are they having a laugh?

    When it comes to national stereotyping, the Irish – among others – know it can pay to play up to outsiders' expectations, says DJ Taylor
    Gavin Maxwell's bitter legacy: Was the otter man the wildlife champion he appeared to be?

    Otter man Gavin Maxwell's bitter legacy

    The aristocrat's eccentric devotion to his pets inspired a generation. But our greatest living nature writer believes his legacy has been quite toxic
    Joanna Rowsell: The World Champion cyclist on breaking her collarbone, shattering her teeth - and dealing with alopecia

    Joanna Rowsell: 'I wear my wig to look normal'

    The World Champion cyclist on breaking her collarbone, shattering her teeth - and dealing with alopecia
    Bill Granger recipes: Our chef gives raw ingredients a lift with his quick marinades

    Bill Granger's quick and delicious marinades

    Our chef's marinades are great for weekend barbecuing, but are also a delicious way of injecting flavour into, and breaking the monotony of, weekday meals
    Germany vs Argentina World Cup 2014 preview: Why Brazilians don't love their neighbours Argentina any more

    Anyone but Argentina – why Brazilians don’t love their neighbours any more

    The hosts will be supporting Germany in today's World Cup final, reports Alex Bellos
    The Open 2014: Time again to ask that major question - can Lee Westwood win at last?

    The Open 2014

    Time again to ask that major question - can Lee Westwood win at last?