AIC slams critics of ‘ongoing charges’ approach

Some critics of the Association of Investment Companies’ methodology for calculating ‘ongoing charges’ to replace total expense ratios have been “wide of the mark”, the body’s director general said.

At the beginning of this month, the AIC scrapped the use of total expense ratios in favour on ‘ongoing charges’, due to the implementation of new rules from Europe for investment trusts to produce key investor information documents (Kiids).

The move is also designed to make it easier for investors to be able to compare closed-ended vehicles with open-ended funds, by ensuring a consistent approach across both.

Ian Sayers, director general of the AIC, said he accepted that trying to find a single methodology to cover the whole investment company sector was “never going to be easy” and while the AIC did not expect universal support, “it is a pity that some of the comment has been so far wide of the mark”.

He pointed out rules that are easy to accommodate in the world of listed shares were not always easy to read across to private equity, property, etc.

Mr Sayers said: “Critics have, in particular, pointed to the exclusion of performance fees which isn’t the case as they will be included in a separate figure.

“When we set ourselves the task of coming up with these recommendations, we wanted something that could enable investors to compare investment companies to each other using a robust and consistent standard.

“But crucially, we also wanted to allow comparisons between investment companies and open-ended funds. Indeed, one of the most common requests from advisers in the lead up to RDR has been for equivalent information from investment companies to make such comparisons possible.”

Open-ended funds will shortly be required to produce ‘ongoing charges’ information in the new Kiids.

The European rules, which govern how ‘ongoing charges’ must be calculated, exclude performance fees.

According to Mr Sayer, funds cannot put an additional ‘ongoing charges’ figure into the Kiid including performance fee as “the rules are prescriptive” and additional information cannot simply be added in.

Mr Sayer said that if the AIC had gone its own way, it would have “gone even further” than the European rules require.

He said: “Whilst European rules only require the disclosure of the terms of the performance fee, we have recommended showing additional figures for the percentage paid in performance fees, and a total of the performance fees and ongoing charges.

“We will be putting all this information on our website so that investors can see the breakdown between ongoing charges and performance fees and we are recommending our members do the same wherever they publish this information.”

Mr Sayers emphasised that anyone who wants to compare investment companies with open-ended funds on a like-for-like basis can do so.