When buying into a fund – particularly an actively managed one – one of the key consideration’s investors have to make is cost. Not only how much do you want to invest, but how much will it cost you to keep that investment over time, namely the ongoing charges figure or OCF.
The OCF is a calculation of the operational expenses of owning a fund and includes a range of costs and is calculated by taking the sum of expenses incurred during the past 12 months and divided by the average net assets over that period.
Research carried out by FE Trustnet found which of the UK funds from across the IA UK Smaller Companies, IA UK All Companies, and IA UK Equity Income sectors had a top quartile performance over the past five years to 30 June 2019.
Of those, FE Trustnet highlighted which funds were the most expensive (bottom-quartile OCF) and which gave you top returns at a cheaper cost (top-quartile OCF).
Source: FE Analytics
As the table above shows, the fund which achieved a top quartile return over five-years but also with the lowest OCF charge was the Franklin UK Equity Income fund.
The £732.8m fund has an OCF of 0.52 per cent and is co-managed by Colin Morton, Ben Russon, Mark Hall and made 46.34 per cent returns over the measured time period.
Launched at the end of May in 2012 the fund aims to make returns by outperforming the FTSE All Share index with a bottom-up stock selection process.
The predominantly large-cap fund’s top holdings include some of the biggest names in the FTSE All Share, such as Royal Dutch Shell (5.02 per cent), BP (4.92 per cent), Glaxosmithkline (3.79 per cent).
The process has been largely unchanged for years, looking to invest beyond the mainstream noise and discussion being spread in the news and shared amongst their peers to identify high-quality companies. Companies capable of generating an income which can contribute long-term growth to the portfolio.
The next fund which is arguably one of the best value for money is the £126m Santander Equity Income Unit Trust. With an OCF of 0.53 per cent, it was only slightly more expensive than the Franklin Templeton fund, both of which came from the IA UK Equity Income sector.
Managed by Graham Ashby and Duncan Green the fund aims to produce a significant level of income through capital growth, by investing in equities, corporate bonds and convertible stocks.
Another well-known fund and the biggest of our cheap top quartile performers was the £7.2bn LF Lindsell Train UK Equity fund, managed by FE Alpha Manager Nick Train.
Looking into the value of the OCF compared to the performance analysts at Square Mile Investment Consulting and Research said that the fund’s charges are “extremely competitive”.
“Not only is its annual management charge at the lower end of the peer group its OCF, which reflects an additional layer of expenses, is well below the sector median,” they said.
The cheapest top-quartile small-cap strategy was the five FE Crown-rated Marlborough Nano Cap Growth fund, overseen by FE Alpha Managers David Walton and Giles Hargreave and colleague Guy Feld. With an OCF of 0.8 per cent, the £206.1m fund has made a total return of 73.18 per cent. The best performing cheap small-cap strategy was the Merian UK Smaller Companies Focus fund, overseen by Nick Williamson. With an OCF of 0.84 per cent, the £353.9m fund has made a total return of 119.94 per cent.
Source: FE Analytics
Of the 15 funds with a top-quartile performance and bottom-quartile OCF, Liontrust UK Smaller Companies had the most expensive OCF of 1.4 per cent whilst delivering the third highest returns.
Based in the IA UK Smaller Companies sector the £1bn fund does run at a premium OCF, compared with a median OCF across the sector of 0.88 per cent. But this premium rate according to Square Mile is justified due to the proven ability of the fund’s “unique, tested and well proven strategy”.
The team formed of two FE Alpha Managers Anthony Cross and Julian Fosh – alongside Victoria Stevens and Matthew Tonge – follows its proprietary ‘Economic Advantage’ process which aims to invest in companies which have a durable competitive edge it will generate above-average returns long-term.
Another fund worth highlighting is Troy Asset Management’s Trojan Income fund, which is the largest fund out of the 15, but produced the lowest returns out of this top quartile group. The £2.9bn fund has made a total return of 41.14 per cent over five years.
Although not the most expensive, it is at the higher end of the average OCF charge within the IA UK Equity Income sector. There the average is 0.87 per cent whereas the Trojan Income fund runs an OCF of 1.02 per cent.
In the IA UK All Companies sector, the top-performing fund with a bottom-quartile OCF was FE Alpha Manager Keith Ashworth-Lord’s CFP SDL UK Buffettology fund, which has made 108.91 per cent in the period under review albeit with an OCF of 1.23 per cent.
Performance of fund vs sector in 5yrs to 30 June 2019
Source: FE Analytics
The £1.1bn, five FE Crown-rated fund is popular among investors and follows a similar process to its namesake Warren Buffett. It aims to deliver an annually compounding rate of return over the long term – defined by the manager as a five-to-10 year period – investing in a concentrated portfolio of UK stocks.