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Home > Investments > Equities

What’s in a name?

The debate of opaque investment terminology goes beyond a simple misinterpretation of terms

By Andy Gadd | Published Jun 13, 2012 | comments

Calculation

How do you calculate or know a ‘total cost of investment’ figure?

With reference to a potential total cost of investment calculation Richard Saunders of the IMA has argued what better measurement is there than net performance – the actual return experienced by investors. Mr Saunders has explained that the fact is that if you subtract the TER and the net performance from the benchmark, what you are left with is the impact of the manager’s investment decisions, along with trading costs and all these so called ‘hidden’ charges - which seems to me to be a fair point. Although the specific figures quoted by the IMA have been challenged by some and with reference to that I am reminded of the oft-quoted fact that there are lies, damned lies and statistics and that apparently 26.3 per cent of statistics are made up on the spot.

The fact is that this calculation can really only accurately be carried out on a case-by-case basis and is still potentially flawed in certain respects.

Ultimately investors (and advisers) should understand the limitations of TERs, ‘ongoing charges’ or whatever calculation is published and advisers should make sure that all potential costs are fully explained or at the least referred to at outset, probably by reference to the latest Report and Accounts or other appropriate documentation/literature.

The fact is that a TER provides investors with a clearer picture of the total annual costs in running an investment fund than just quoting an annual management figure, but ultimately my view is that ‘total expenses ratios’ or whatever is published are simply another area where the press and others are able to ‘bash’ the investment industry for allegedly not being transparent, without necessarily understanding the full debate.

Andy Gadd is head of research of Lighthouse Group Plc

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