Should we fight high fund charges?
Investment | Unit Trusts
By Justin Modray, published 08 July 2011.
When most of us want to earn more money we have to work harder or more productively. And in these austere times even that might not work. But for fund managers it’s a lot easier, they just hike their fees - usually with little justification.
I first covered this topic on the site a year ago, but a couple of announcements this week have promoted a re-visit.
There are plenty of past examples where fund managers have raised fees for no other reason than it makes them more money.
The most obvious that springs to mind is Invesco Perpetual raising the annual charge on several funds, including Neil Woodford’s High Income fund, from 1.25% to 1.50% in June 2004 - boosting revenue by over £13 million a year since then. Their argument for doing so at the time? I seem to remember it was something like "well, most others charge 1.5%, so we're 'harmonising' our charges with the market." I'd better not print what I thought of this at the time, but let's just say 4 letters would suffice...
Moving swiftly on, Henderson and Standard Life Investments have both announced fee increases this week that prompt me to use those same 4 letters. Standard Life Investments, who deserve much credit for turning a lacklustre insurance company arm into a decent investment house, will be raising the annual management charge on 7 of its funds. The highest profile of these is the £1.2 billion UK Smaller Companies fund run by Harry Nimmo, which will see the annual charge rise from 1.5% to 1.6%. In total I reckon these increases will make Standard Life Investments an extra £2.3 million a year based on current fund sizes.
Their reason for doing so? The official quote is 'At Standard Life we conduct regular reviews of our products to ensure our fund charges remain competitive with the market...'. So hiking charges makes them more competitive? Standard Life is obviously on another planet to the rest of us!
Not to be outdone, fund giant Henderson, which recently bought Gartmore, has said fund administration charges (i.e. those charges on top of the annual management charge which make up the total expense ratio (TER)) on Gartmore funds will be brought in line with Henderson funds. The upshot is that the majority of Gartmore funds will see their TERs rise, by as much as 0.1% or more. I've yet to see the exact changes, by I wouldn't be surprised if they end up costing investors an extra £4m or more a year.
Quite how running more funds increases costs is beyond me, hasn't Henderson heard of economies of scale?
And then there's performance fees
If you buy an absolute return fund, chances are the manager will charge you the standard 1.5% a year plus a performance fee, in some cases 20% of all positive returns. So if the manager does a bad job they take home the usual fee and if they do an ok or good job it'll be a lot more.
Performance fees are fine where they ensure the manager shares risk with investors, i.e. their income is higher than usual if they do well and less than usual if they perform poorly. But fund managers don't seem to like doing anything that risks them earning less money. A few years ago (when at Bestinvest) I did try persuading a few fund groups to introduce fair performance fees along these lines, I'd have stood a greater chance of raising the dead.
It's obvious the concept of fairness is lost on most of the fund management industry and that they only care about one group of people - themselves.
What should we, as customers, do?
My gut answer is boycott greedy managers who don't treat customers fairly. But in practice, it's not that simple.
I still hold Invesco Perpetual High Income, despite my disgust at the fee increase mentioned above. Why? because I believe Neil Woodford will make me more money long term than a tracker fund. I also hold Standard Life Investments UK Smaller Companies. I'm sorely tempted to sell in protest, but Harry Nimmo is a great manager who's probably worth 1.6% a year if he continues outperforming his peers.
The trouble is, unless we stand up to fund managers by moving money elsewhere when they hike charges or introduce greedy performance fees, they'll continue to walk all over us.
So what is the answer? Should consumers try to band together and regain some power over fund groups? Or should we all focus on bottom line returns and be relaxed about charges? Please share your thoughts below...
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Readers' Comments (8) - To post a comment please register or login
Comment by hdeakin299 at 2:49pm on 09 Jul 2011:
This is an interesting area:- A month or so ago I read an article in a newspaper by Ruth Sutherland . It said :- "Jupiter was the biggest faller in the FTSE 350 despite reporting a big increase in profit after the manager fell short of revenue forecasts.Its shares lost 18.2p to 300.1p" and also :- "Bonham Carter said revenues of £230.5m were shy of City predictions of around £238m due to a shift towards lower fee business in the second half of the year. He added that a shake-up by regulators would lead to lower margins on fees in the future."
So investors are reacting and this reaction appears to have had an impact on some companies bottom line.So how will the fund management companies react? Some of them like the one above have suffered from declining profits. So are fund management companies going to increase charges to claw this back or a they going to reduce fees and charges to get more business volumes?
I think some will go one way and others will go the other.In these circumstances having good information about who is doing what is vital . In a "CLICK AND GO " internet environment like online investing it is all to easy to make (not a quick but ) a CLICK mistake and pick an expensive product . Good information and help from a site like this one is a great way of minimising the inevitable errors that sometimes occur.
Comment by Mickey at 11:39am on 10 Jul 2011:
Maybe the increases will allow them to trumpet future price reductions?
Comment by rbjones at 6:44pm on 10 Jul 2011:
I agree I think UK charges are an absolute scandal, in absolute terms and relative to the US. In an investment world where returns are reduced ( realistically you will be lucky to get much better than 6-8% gross annual returns on equities) the fund managers are going to take about a quarter of your return!!
What to do I really don't know. It has to be a widespread constant noisy lobbying of people in power and constantly highlighting the daylight robbery poor value and cheaper alternatives. Somebody has to start Justin why not you and all of us. Problem of course newspapers get advertising revenue and not many votes in protecting so called "rich" people with money to invest bit we have to try!!
Comment by pvcdoc at 7:12pm on 10 Jul 2011:
Don't forget Investment Trusts - many of them have low TERs and good performance.
Comment by hdeakin299 at 12:17am on 11 Jul 2011:
Further to my comment above I notice that in the Sunday Times 10/07/11 Kathryn Cooper has an article headed "Fund Firms are taking lessons from Banks" . She cites that recent fund fee hikes that Standard Life have recently applied :- "Last week , Standard Life raised the annual fee on several funds , even though the Financial Services Authority (FSA) thinks the long term trend in charges is down." She adds "Things could be changing. Several fee based advisers are reviewing whether to recommend Standard Life's Funds. That wouldn't have happened a few years ago. Philippa Gee , an independent adviser said :" I , for one , will have to question further use of the funds. My clients are increasingly price-conscious".
So why did they do it ? It may be that fund groups that are owned by banks feel that they can be more "price insensitive" because their parent company has made a high marketing contribution simply by having branches on the "High Street" . People who are bank customers may also be deemed less likely to look elsewhere.
At least bank customers are getting the benefit of their local branches: but customers buying on the internet are not getting this but are still being asked to pay the same charges. Will they do it? The answer to this looks less clear than it once was.
Comment by justin at 11:32am on 11 Jul 2011:
Thanks for all your feedback so far. pvcdoc, agree that ITs can be cheaper (largely because they don't bundle sales commissions/platform fees within their annual charge), although some ITs have surpringly high TERs, so always pays to check.
I'm game for trying to highlight the issue more widely, although will need to join forces with others, as sadly I doubt my humble website currently has enough clout to do it alone...
Comment by ivanopinion at 9:40am on 19 Jul 2012:
It really depends on whether you think it is possible to predict which fund managers will deliver significant outperformance in the long run.
If I correctly understand the figures calculated by BestInvest, Neil Woodford has, over a 23 year career, delivered average outperformance of 0.3% per month. (http://www.bestinvest.co.uk/investment-research/fund-research/fact-sheet/axaiomiphi/axa-iom-invesco-perpetual-high-income-lf/manager) As far as I can tell, this is not an annualised equivalent, so if we compound this over a year, he has delivered an average of more than 4% outperformance per year (although not necessarily every year).
Is it worth paying an extra 0.1% AMC to get an average 4% outperformance? Of course it is. ...As long as you are sure that the historical outperformance is likely to continue. As Justin explains in his article regarding trackers, the proportion of fund managers who deliver long-term outperformance is no higher than the proportion of monkeys who would, even though they are picking randomly, happen to deliver long-term outperformance, due to the laws of statistics. In other words, even over, say, five years, some monkeys are going to be “lucky" and their random selections will happen to beat the market (i.e., the average performance) every year. Does that mean that the lucky monkeys are any more likely to outperform over the next five years than the average? No way. They are just monkeys.
So, my attitude is that I'm not going to pay a premium AMC unless there is exceptionally strong evidence that the fund manager in question is not just a lucky monkey. A good record over three years or even five years proves nothing as far as I'm concerned. With Neil Woodford, we are looking at a 23 year record, so he is one of a handful of fund managers for whom there is strong evidence that he is not just a lucky monkey.
Comment by ivanopinion at 9:44am on 19 Jul 2012:
A new twist on this issue may perhaps arise over the next few months. The FSA is introducing bans on trail commission and platform commission for advisers and platforms. For a standard actively managed equity fund, the standard trail commission has generally been 0.5% and the standard platform commission has been 0.25%, so it should be expected that fund managers will introduce new fund classes with the AMC reduced to 0.75%. However, I wonder how many of them will sniff the opportunity to keep some of the money they previously handed over as commission, so we might see AMC's only falling to, say, 1.0%.