There are various ways of looking at a fund’s costs, with the most common being the ongoing charge figure (OCF). However, it is important to consider other costs that fall outside of the OCF, such as transaction costs, and other factors such as the level of performance the fund manager generates for the costs involved, particularly if there is a lower cost passive alternative. 
The recent requirement for asset managers to provide an Assessment of Value for investors should highlight these considerations. While both the OCF and transaction costs are important in their own right, they should not form the sole basis for a decision. As in any walk of life, some people may be prepared to pay more for a better-quality product.
In recent years, the fund management industry has been tasked by regulators with clarifying what costs investors bear when they invest in a fund. Historically, asset managers simply published the annual management charge (AMC), which is the headline amount that their firm receives.
However, this does not necessarily include all the extra expenses involved in running a fund. The platform provider may have also received a percentage, as might the independent financial adviser in the form of ongoing trail commission. Any dealing costs within the portfolio and other costs, such as audit and administrative fees, remained a mystery to the end investor, unless they pored over the annual report and accounts.
The advent of the OCF helped clarify and articulate some of the other costs to investors and became well recognised across the industry, which consisted of the AMC and other expenses such as the audit, regulatory and administrative fees.
Following the Retail Distribution Review, trail commission on new investments was banned and most fund managers unveiled new clean share classes, but they still do not give a full picture on the costs involved in running a portfolio.
This was followed by the requirement to publish a Key Investor Information Document (KIID), which aimed to standardise and break down all of the costs involved in running a fund. However, a review by the Financial Conduct Authority in February 2019 highlighted the difficulties for investors in understanding the full extent of the costs that they are being charged, as asset managers were found to not necessarily be disclosing all of the costs and charges or there were inconsistencies in reporting across documents and websites.
We believe that the regulator would like the industry to move to a Total Cost of Investing (TCI) figure, so that the end investor can make quick, like for like comparisons across funds on the costs involved when investing in them.
The TCI should be made up of the OCF, the transaction costs for running the portfolio including commissions, stamp duty, slippage, etc., performance fees and borrowing charges. These are all the charges that should be detailed in the fund’s KIID.
Transaction costs are split down into explicit and implicit costs. Explicit costs include broker commissions and taxes and levies, while implicit costs are more difficult to calculate as they take into account bid-offer spreads, market impact, opportunity cost and delay cost.
At present, there is some unease regarding the comparison of transaction costs as there is not a standardised approach across the asset management industry.
The initial ex-ante transaction costs from asset managers can range from best estimates to very precisely calculated figures. Whilst the ex-post transaction costs that can be calculated in a number of ways, such as using different spread methodologies, slippage methodologies or expected cost models, thus making like for like comparisons challenging.
It is also worth noting that these costs are not a separate charge to investors as they have already been taken into account in the net asset value (NAV) calculations of the fund.
To complicate matters further, for each fund there could be many different share classes, each with variances in distribution policy, currency hedging methodology and the treatment of costs. The cost analysis needs to be performed on every single share class for each fund and it is important that investors make sure they understand the TCI for the share class that they are invested in, which may significantly differ from others. Once these calculations have been standardised, the TCI should summarise the overall level of charges, on a like for like basis.
The costs associated with investing in a fund are complex and there are a number of ways in which fund groups choose to calculate and display this information. In order to provide greater clarification and comparison, Square Mile and FE fundinfo have developed the Fund Dashboard. Alongside four other key fund elements, the dashboard provides insight on a fund’s fee and cost structure as well as provide context by comparing these costs to other funds within the relevant peer group.
Whilst the asset management industry may still have some work to do when it comes to a consistent approach to calculating and displaying costs, the Fund Dashboard aims to bridge that gap by displaying these costs in a clear and understandable way.
Jock Glover is COO, Research and Consulting at Square Mile. The views expressed above are his own and should not be taken as investment advice.