Trading costs are a controversial topic within the industry, and fund managers are not required to report them, leading some analysts and campaigners to describe them as “hidden costs”.
Fitz Partners’ research suggests that trading charges on the average IMA UK Equity Income fund are worth 0.28 per cent a year, meaning that fees could be reduced by that amount if fund managers had to pay them rather than passing them on to investors.
The fund management industry has resisted making these charges explicit, which SCM Private’s Gina Miller, says is deceiving.
“It’s something fundamental to the job that the fund manager does and the perception would be that it’s part of the [ongoing] charges,” she said. “If it isn’t then what are they charging the annual management charge for?”
Trading costs are those fees that are paid to brokers when buying and selling stocks, and are therefore likely to be higher on funds with higher turnover of positions.
Fitz Partner’s figures are derived using a methodology used in America, where funds are required to list their transaction costs, and are calculated from publically available disclosures and accounts.
They show that the cheapest IMA UK Equity income fund deducts just 0.05 per cent from an investor’s returns due to trading costs and the most expensive 0.88 per cent.
In the IMA UK All Companies sector there is even greater disparity, with the cheapest fund incurring no trading fees and the most expensive 2.68 per cent. The average is very similar to that of the equity income sector however.
Source: Fitz Partners
In the IMA Global sector trading costs are lower, surprisingly, with an average figure of just 0.19 per cent.
Hugues Gilibert, chief executive of Fitz Partners, said: “For the first time, our unique calculation of trading fees will allow fund professionals to get much closer to a true measure of total charge on UK investment funds assets.”
“We believe the use of the US methodology will help UK and European savers and professionals to better measure funds’ level of trading and will allow meaningful comparison with their US equivalents which are still globally showing lower level of fees.”
Trading costs are implicitly linked to turnover, with higher turnover implying higher trading costs.
However, Fitz Partners’ figures suggest that the average portfolio turnover is highest in the IMA Global sector, which has the lowest trading costs.
Miller notes that trading costs don’t only include the actual costs of buying and selling but the money that is paid to brokers for research, often included in the business deal that sees fund houses use a particular broker.
“The costs are inflated by the charges they are paying for research,” she said. “The FCA had an opportunity to look at this but they said it just has to be “of particular value”.”
Whatever the rights or wrongs of paying for research, there is a genuine issue over whether this research is being read at all.
“The number of research reports that are opened is pitifully low,” Miller said. “Expensive research is being unread.
Miller cites figures from the IMA suggesting that 38 per cent of analysts don’t read any of the bundled research they are given.
One study even suggested that of 26,000 research reports in the UK only 6 per cent were read,
Current IMA guidelines only recommend that fund houses disclose separately their trading costs and don’t require it to be included in the ongoing charges figure.
Forcing groups to be transparent in this regard could see research and trading costs come down, suggests Miller.
Last week Steve Webb, pensions minister, suggested for the first time that pension funds may be forced to break out trading costs where they disclose charges,
Webb is proposing a cap on pension charges and considering which disclosure requirements will be imposed.
He has previously refused to include trading costs in the mix, and his comments last week represent something of a reversal.
Miller’s True and Fair Campaign claims that UK investors are paying 58 per cent more than their US counterparts thanks to the lesser transparency in this country.
The requirements in the retail distribution review that charges be “unbundled” and made more clear has in fact led to a 28 per cent increase in fees, they claim.
FE Trustnet recently looked at the low prices now available on many funds following these reforms.
The campaign published a report entitled “legalised looting” last week which suggests that 29 per cent of UK investors don’t know what they are being charged.
“For over 10 years US investors have had a much fairer deal, and benefitted from an investment industry with higher standards and ethics,” Miller said.
“The US regulator and politicians have ensured their investors benefit from much greater transparency, a more competitive industry, less conflicts of interest and considerably lower charges. The question is why have the UK regulator and politicians been dragging their feet for so long?”
She argues that to complete the reform process begun with the budget’s loosening of annuity rules the government needs to look at the charging structure of the fund management industry. "The Budget illustrates that the Government has finally woken up to the scandalous treatment of pensioners in respect of annuities,” Miller said.
“However the annuity pensions' shakeup is only a partial fix. If pensioners choose an investment fund rather than an annuity, they can still be ripped off as they will not know the true total cost. Instead they will be jumping out of the frying pan into the fire.”
