Despite the extra requirements of the Key Investor Information Documents (KIIDs), Miller says there are substantial charges and fees that remain hidden to clients.
“It’s legalised fraud – customers are being misled because they cannot see all the costs and fees,” he said. “The total expense ratio (TER) is absolute nonsense because it gives you the impression you are getting everything but you’re not.”
The TER figure excludes dealing costs, as well as the fees a manager pays when he buys or sells holdings. IMA chief executive Richard Saunders defended the concept last week, saying that dealing costs should be considered a part of the natural process of management; however, Miller disagrees.
“One of the biggest costs is the cost of buying and selling, and of course it varies from fund to fund, but it can often be greater than the TER,” he said.
“Having denied that people have been misled, the IMA have gotten around this by encouraging fund managers to publish their dealing costs somewhere else. The IMA says the dealing costs are part of the natural process of fund management so shouldn’t be added to the costs, but this is absurd,” he added.
KIIDs are intended to replace TER with an ‘on-going charges’ figure which would include dealing costs, to better inform clients about the price of their investments. However, Miller says even this isn’t sufficient.
“KIIDs require on-going costs, but the way they are calculated – on a twelve-month period – means funds can record having no performance fees because they failed to meet their targets. In a way they’re worse because of this,” he explained.
“There are some funds that say there are no performance fees, but that is only because there weren’t any in this particular year. If you look at previous years you can see the managers did take performance fees of 15-20 per cent because they did meet their targets.”
He also claims that the way transaction costs are calculated is also misleading. “You only have to include taxes, like stamp duty, and commissions, not the spreads, so for example there is one huge UK fund that reports it has bought £6bn of bonds in one year and sold another £6bn, but says there were no transaction costs, this is obviously impossible. Because you don’t pay stamp duty on bonds you can report that there were no costs.”
Miller claims that SCM Private has also found examples of funds that are mis-reporting their TER, and multi-manager funds that fail to properly include the costs of the underlying funds.
He says that the current situation in which investors have to calculate and research charges themselves and try to second-guess the figures they’ve been given is unacceptable.
“We need to have one number which is comparable so investors can compare one fund with another,” he said.
Miller says that the UK is eight years behind the US on transparency, with managers able to conceal from their investors where their money is being held.
“In the US you can see online at least quarterly the whole portfolio, but in the UK they just report the biggest ten holdings. Typically this is only 40 to 50 per cent of the portfolio.”
“Most companies don’t even publish the total holdings online annually, but publish it in hard copy so investors find it harder to get hold of.”