Fund Features

Recently, I described how low-cost fund giant Vanguard is urging legislators to make the calculation of investment funds' Total Expense Ratios (TERs) more transparent -- as well as enforce their use for marketing purposes. From comments left, it seems that readers agree.

I've now got some financial services industry reaction to that proposal -- as well as some interesting data to share.

Let's start with that data. It comes from the Investment Management Association (IMA (Milan: IMA.MI - news) ), the trade body for the UK's asset management industry, and was published this week.

Trackers

In the case of trackers, says the IMA, examination of the average FTSE All-Share (news) tracker fund in the IMA's UK All Companies sector shows that over the last ten years, after charges, investors would have received 0.55% a year less than the return on the index.

That's rather less, it then points out, than the average TERs for these funds, which is 0.82%. In other words, says Richard Saunders, the IMA's chief executive, "The average UK tracker fund delivers on its promise, with the actual cost of investing working out cheaper than the TER published by each fund."

Source: IMA, Lipper Hindsight, Financial Express

Such data isn't, perhaps, hugely surprising -- although an average 0.82% TER for a bog-standard tracker is certainly mildly horrifying. Simply put, trackers -- being passive investments -- don't actively trade. 'Churning' only occurs when firms leave or join the relevant index, and Stamp Duty Reserve Tax (SDRT) is only paid when units are bought and sold.

Active funds

In the case of actively traded funds, the IMA's figures are little more surprising. You can't fairly undertake a comparison against a benchmark index, it points out, because the funds themselves aren't aiming to do that.

But what you can do, it says, is look at how these funds in the UK All Companies sector have performed against the index, and see whether the price you pay for actively-managed funds delivers a return that beats the index, after costs.

And, it seems, it does -- at least, if you've bought into the right funds.

The top 10% of actively-managed funds in the UK All Companies sector delivered at least 64% growth over five years, outstripping the FTSE All-Share Index over the same period by at least 2.5% per year (28% in total), even after charges.

Investors in the bottom 10% weren't so fortunate: the least well performing 10% produced returns of zero or less over the period, equivalent to under-performance of the FTSE All Share Index by 2.6% a year. For which, of course, they'll have paid a further 1.75%-2.0% in annual management charges, and rather more in terms of TER.

And taking the average as the mid-point between these extremes, the IMA says the conclusions are clear.

"Over the last ten years the average actively-managed UK fund has produced a performance which got investors their charges back, with many doing better when compared to the FTSE All Share Index," says the IMA's Richard Saunders. "There is nothing here to suggest that dealing costs drag down performance."

Of course, as usual, we should point out that these performance tables only include funds that lasted the full five years in question. So we are not looking at a complete set of data.

The verdict

In the case of actively managed funds, you could argue that if you're canny enough to select a fund that delivers, then smallish differences in TER don't matter. And if you're in the wrong fund, you've bigger concerns, anyway.

As Ben Yearsley, investment manager at Hargreaves Lansdown (LSE: HL (002105.SZ - news) ) puts it, the very act of signing up for an actively managed fund means by implication accepting an unknown level of transaction costs, because that's what actively managed fund managers do: trade.

And what about trackers? Rob Fisher, head of UK personal investment at fund giant Fidelity, is all for the fuller disclosure of TERs. "We think that the disclosure of both AMCs and TERs provide distinct and transparent pieces of information for investors," he told me. "In the case of tracker funds, investors absolutely need to see clear information about such charges."

Fidelity's website, he points out, clearly states both the AMC and TER charges for the company's popular MoneyBuilder Index Fund. Furthermore, he adds, Fidelity is also lobbying for the TER to become the de facto standard charge disclosure in the new 'Key Information Document' legislators are consulting on.

So that's the view of Fidelity, providers of the UK's third-cheapest All-Shares tracker.

For their part, HSBC (LSE: HSBA.L - news) (LSE: HSBA), providers of the UK's second-cheapest tracker, broadly agree.

"Retail investors are best served by straightforward and simple pricing which makes it easy for people to compare products," says David Chellew, head of marketing at HSBC Global Asset Management.

But he's more cautious over Vanguard's stance regarding a revised form of the TER -- one that made transaction costs more explicit.

"As an industry, we don't help ourselves by over-complicating issues, and losing sight of what private investors are looking for," he points out. "That said, while we'd prefer a simple measure, we don't really care, as long as whatever measure is chosen makes it easy for investors to cross-compare."

So those are the views of the UK's top-three cheap tracker providers, on an issue that's important to all of us.