What’s in a name?
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In focus: Regulating Exchange-Traded Funds
The reason for this article is that there are a couple of pieces of terminology used in our industry which cause a certain amount of, let us call it, frustration.
One is the use of the term ‘guaranteed’. Now ‘guaranteed’ has been used historically and indeed continues to be used by product providers to describe various offerings and the cause of frustration for me is that I fully understand what I mean by ‘guaranteed’, and I am absolutely certain that a client will know what they mean by ‘guaranteed’, but our industry can sometimes use a different, altogether less satisfactory definition. But that debate is perhaps one for another day.
The other piece of terminology that I find frustrating is total expense ratio. The fact is that members of the public, certain journalists and even some IFAs believe that the ‘total’ as used in this phrase means what it appears to mean - when of course the fact is that it does not.
The subject of TERs has been highlighted recently for two main reasons, although of course it is a subject that has appeared in the press regularly over the last few years.
First the Association of Investment Companies, which represents investment trust managers, has announced that it will no longer publish a TER in the literature that it produces for investors but will, instead, publish an ‘ongoing charge’ which will include various administrative fees such as management and registration fees but not performance fees, which of course over half of investment trusts potentially have as part of their charging structure. (Although it is worth noting that with reference to performance fees the AIC has clarified that it recommends that members should also disclose details of the performance fee and publish a separate percentage figure for the performance fee and a total showing the ‘ongoing charges’ calculation plus the performance fee.)
Second, some fund managers and platforms have recently clashed over what should be disclosed as the TER and who is responsible for ensuring that the TER figure quoted is accurate. In this respect it has been reported that some fund supermarkets and platforms are showing the TER for a number of funds net of the performance fee, making these products look significantly cheaper than they actually are and potentially breaching the FSAs guidance on how to calculate a TER which indicated that performance fees should be included.
Both of these events have generated various column inches in the press but it is worth noting that apart from performance fees the fact is that a TER, or indeed the new ‘ongoing charge’ calculation proposed by the AIC, does not cover various items such as, for example, trading costs, interest costs and stamp duty. As well of course as not including ‘one-off’ charges such as initial or exit charges.