Some 59 per cent of FE Trustnet readers will not pay more than 1 per cent in ongoing charges for an active UK equity fund, according to the latest FE Trustnet poll, while some 22 per cent of the 2,637 who voted wouldn’t buy a fund with a clean ongoing charges figure (OCF) of more than 0.75 per cent. 
There has been increased scrutiny on charges and fees within the fund management industry over recent years thanks to the implementation of the Retail Distribution Review (RDR), the price war among passive fund providers and the emergence of smart beta offerings within the UK market.
RDR, for example, has led to the introduction of clean share classes which has allowed for greater transparency within the industry as investors can easily distinguish how much they are paying for a fund manager’s expertise.
Indeed, it is now commonplace within the comment section on FE Trustnet to see debates about funds with high OCFs, with some stating they wouldn’t touch expensive portfolios with a barge pole and others saying they are happy to pay more for top quality active management.
In order to gauge the opinion of our readership on the matter, our most recent poll posed the question how much (in terms of a clean OCF) investors would pay for an active UK equity fund.
According to the poll, 22 per cent wouldn’t pay more than 0.75 per cent, 37 per cent wouldn’t pay over 1 per cent, 21 per cent wouldn’t pay more than 1.25 per cent and 21 per cent would pay more than 1.25 per cent.
These results may not come as much of surprise to many, especially as the average active UK fund OCF is just shy of 100 basis points (0.9975 per cent). However, by analysing the three primary UK equity sectors – IA UK Companies, IA UK Equity Income and IA UK Smaller Companies – interesting statistics emerge.
For example, by not paying more than 0.75 per cent for an active UK fund, 22 per cent of our readers are ignoring 91 per cent of the funds available in the three sectors. Though to a much lesser degree, those who wouldn’t pay more than 1 per cent are ignoring 30 per cent of UK active funds.
These include highly popular funds such as Old Mutual UK Dynamic Equity, Trojan Income and Standard Life Investments UK Equity Income Unconstrained.
Rob Morgan, pensions and investment analyst at Charles Stanley Direct, says investors are right to focus more they are paying for active fund management, though.
“Charges certainly have a bearing on our decisions and can be a ‘deal breaker’ even if we really like the manager and the process. I would say this is particularly the case for performance fees but the same does apply for an excessive OCF,” Morgan said.
“With passive funds getting ever cheaper the active funds industry really does have to justify its higher fees and, in particular, it seems strange that there is a lack of price differentiation compared to other industries – e.g. a fund with a new, unproven manager often has a similar cost to an already-successful one with a proven track record.”
“It is also important to remember that OCF is partly a function of fund size. Any fixed costs have a larger bearing on small funds and as a fund attracts assets the effect diminishes. Thus, it is important to consider how OCF might change over time.”
Indeed, FE data shows (albeit in a relatively crude way) how charges have impacted an investor’s returns over time.
Performance of most and least expensive UK funds over 5yrs
Source: FE Analytics
The table above shows the performance of six different composite portfolios – the most and least expensive active funds within the IA UK All Companies, IA UK Equity Income and IA UK Smaller Companies sectors (as measured by top and bottom quartile) over five years.
It shows that in all three peer groups, an equally weighted portfolio of the funds with the lowest OCFs have outperformed a similarly weighted portfolio of funds with the highest OCFs over that time.
According to FE Analytics, while the portfolio of cheap IA UK All Companies funds has only outperformed the portfolio of expensive funds from the same sector by 4.45 percentage points over five years, the average outperformance of the least expensive funds in the IA UK Equity Income and IA UK Smaller Companies peer groups stands at a sizeable 18.19 percentage points and 18.90 percentage points, respectively, over five years.
These results do make sense, as for example a manager charging a 0.5 per cent OCF has a far greater starting advantage to beat the index than a manager charging an OCF of 1.5 per cent.
However, as is always the case with this sort of study, there are exceptions to the rule.
One of the best examples is Keith Ashworth-Lord’s five crown-rated Premier ConBrio Sanford Deland UK Buffettology fund, which has been the third best performing IA UK All Companies portfolio over five years with gains of 104.11 per cent.
It is one of the most expensive offerings in the peer group with its current OCF of 1.6 per cent (and that figure was far higher when the fund was sub £15m a few years ago), yet it has more than tripled the returns of the FTSE All Share and far cheaper rivals like Dimensional UK Equity Core and JPM UK Equity Core with OCF’s of 0.4 per cent or below over five years.
Performance of funds versus index over 5yrs
Source: FE Analytics
As such, Premier’s Simon Evan-Cook argues that the price of a fund shouldn’t dictate an investor’s decision of whether to buy or not.
“We treat price when buying a fund manager the same way we treat price for anything else we buy in our lives: we’re looking to get the best value for money,” Evan-Cook said.
“If we find two funds that we think are equally well run, we will plump for the one with the lower OCF. Why would you do it any other way? Of course, it’s very rare that you’ll find two funds that are completely equal, so that’s when discretion has to come into play.”
“So if Fund A was slightly better than Fund B, but Fund A was considerably more expensive, to the point of making it an inferior fund, then we would go for fund B.”
“So far, so common sense. But what we can’t understand is investors who would look to save, in inverted commas, 0.2 per cent by backing an inferior manager, who then goes onto underperform the more expensive, but better, manager by 3 per cent a year for the next 10 years.
He added: “That is not saving money, it is losing it.”
Ben Conway, fund manager at Hawksmoor, agrees with Evan-Cook’s views in so far as he believes that just because a fund is cheap, it doesn’t make it a good investment. However, he says investors are right to keep a close eye on cost.
“In this sense, fees aren’t at the top of the list of criteria when selecting funds. On the other hand, we would certainly be harsher on such a fund were it to suffer a period of poor performance,” he said.
“The problem is that you can’t guarantee performance but you can guarantee costs. And in the current era of ultra-low risk free rates, fees look especially high. But, fees have come down in the past few years and most good active managers have done their bit in trying to minimise their OCFs.”
Looking back at the poll results now and it is interesting to note that UK funds with a clean OCF of 0.75 per cent to 1 per cent (which was the most popular choice among FE Trustnet readers) have delivered the best average return over the past five years.
Performance of UK funds over 5yrs
Source: FE Analytics
However, while it may be no surprise that funds with an OCF of 1.25 per cent or more have delivered the worst average return over five years, those with an OCF of 1 per cent to 1.25 per cent have generally outperformed the cheapest active UK funds over that time.
As FE Analytics now pulls through clean OCFs for all funds in the Investment Association universe, in articles later today we will take a closer look at some of the top-performing UK funds not charging you over the odds as well as the industry’s giants that are still more expensive than their average rivals.
