Investors who dismiss products with high charges as a matter of course are missing out on some of the industry’s leading funds, FE Trustnet research shows.

According to our latest poll, almost three-quarters of investors say they are automatically discouraged from investing in a fund if the fees are above-average.

While high charges can erode long-term returns, there are certain situations where splashing a little extra on management fees can really pay off.

Specialist investments in niche areas such as emerging markets and natural resources carry higher headline TERs because the costs associated with operating in such markets is higher.

These sectors are less researched than developed markets and asset managers need analysts to conduct first-hand data gathering. These markets have also shown that over the long-term they have returned more than their developed, and cheaper, counterparts after fees.

Investment heavyweights such as Aberdeen Emerging Markets, First State Global Emerging Markets and Smith & Williamson Global Gold & Resources all have TERs in excess of 1.8 per cent but with sector-leading returns over the long-term they have proven that sometimes investors really do get what they pay for.

"There are a lot of funds out there that are charging too much and delivering too little," said AWD Chase de Vere’s Patrick Connolly. "Having said that, in order to get access to the very best managers in smaller, more focused sectors such as emerging markets, investors aren’t able to scrimp on the level of TER they pay if they want to see their investments outperform."

Selection of top-performing expensive funds

	TER
Aberdeen - Emerging Markets	1.93
CF Ruffer - Baker Steel Gold	1.89
First State - Asia Pacific	1.84
First State - Global Emerging Markets	1.88
Investec - Global Dynamic Resources	1.94
Jupiter - Merlin Income Portfolio	2.43
Liontrust - Special Situations	1.89
Neptune - Russia & Greater Russia	1.85
Smith & Williamson - Global Gold & Resources	1.85
SVM - Continental Europe	1.8

Source: FE Analytics

Multi-manager funds often face criticism for the extra layer of fees they require. It is not uncommon to find multi-manager products with a TER in excess of 2 per cent. The benefit of this type of fund is that investors who have no time or interest in managing their own investments can outsource asset-allocation decisions to a professional fund manager.

The funds in the Jupiter Merlin range are among the most expensive in the entire IMA universe, with a TER of up to 2.57 per cent, but with returns of 89.98 per cent over the last decade compared with 45.07 per cent from the average fund in the Mixed Investment 20%-60% Shares sector, few unit holders are likely to complain.

Performance of fund vs sector over 10-yrs



Source: FE Analytics

Closer to home, the Liontrust Special Situations fund is in the top-decile for performance over one, three and five years in the UK All Companies sector, yet with a TER of 1.89 per cent, the cost to the investor is far higher than the 1.58 per cent average.

For investors who are set against paying high management fees, there are cheaper options in some of the most expensive sectors.

CF Ruffer Total Return has outperformed the Jupiter Merlin Income fund over 10 years, with a cost to the investor of only 1.54 per cent.

For anyone looking for a fund focused on commodities, Thesis Australian Natural Resources is the cheapest option, with a TER of 1.4 per cent. Our data shows it has returned almost twice as much as the more expensive Investec Global Dynamic Resources fund over three years.

In the emerging markets space Baillie Gifford Emerging Markets Growth is the most cost-effective product, with a TER of 1.54 per cent. However, returns of 46 per cent over the last five years have lagged behind the fund's pricier peers.