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Call for Alpha-related performance fees

Lora Coventry

The cost of investing in a mutual fund should fall as the vehicle’s size grows, TCF Investment says.

David Norman, TCF Investment’s chief executive, has called for more price pressure on managers, low fees for Beta, and performance fees only when Alpha is delivered.

The comments follow the high-profile launches of low-cost vehicles from Schroder and JP Morgan earlier this year.

"It is great to see that fund managers are at last feeling some price-pressure and are reducing fees. A cynic would point to the extent of profit that must exist on their current assets if they can afford to more than halve their fees on new funds and presumably still make a profit," David Norman said.

"It is clear that these moves are in response to the growing trend of investors and advisers in the UK to use low-cost exchange traded funds (ETFs) and index funds."

Norman claims that average total expense ratios (TERs) in the UK funds industry have risen steadily over the last 15 years, in spite of rising asset values.

"Fund managers have been pocketing the benefits of scale, when surely the whole point of a mutual fund was to reduce investor costs. TCF Investment funds have TERs that reduce as funds grow in size – it would be great to see more managers adopt this approach too," he added.

The manager said that annual management charges and TERs are only part of the costs, and warns that the hidden charges of active trading could add another one per cent or more a year.

He asked: "Will we see more [launches of low-cost funds] in the coming months? It is interesting that it is two of the larger groups that have been able to launch these new funds – I wonder whether smaller groups will be able to take the strain." 

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