InvestmentsJul 28 2014

Hullabaloo over hidden charges may be overstated

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Fund trading costs could be significantly lower than experts currently believe, calling into question recent high-profile claims the fund industry is ripping investors off with hidden charges.

Finance professor James Clunie, a portfolio manager at Jupiter, has revealed he has been running a detailed review into his fund’s trading costs, with initial findings showing they are just “one tenth” of the current academic consensus.

Mr Clunie, who is examining risk-adjusted trading costs – including bid/offer spreads, stamp duty, commissions and ‘opportunity costs’ – has sent his early findings to University of Edinburgh researchers Seth Armitage and Gbenga Ibikunle for verification.

He will continue to collect information on his fund, Jupiter Absolute Return, until September 2014, at which point he will have 12 months of data on the fund’s trades under his management.

If verified by the Edinburgh-based academics, the findings could turn on their head recent claims in the UK that funds are wasting vast amounts of investors’ money on ‘hidden’ trading costs.

In 2013, US academic Roger Edelen and colleagues published a report based on just under 1,800 US-based funds, which claimed the funds paid 1.44 per cent a year in trading costs alone. In May this year the UK’s Pensions Institute at Cass Business School referred to the Edelen study and others in a scathing report that claimed asset managers were not doing enough to make their costs clear.

This led to fund transparency campaigner Gina Miller, of SCM Private, to claim that recent attempts by fund manager trade body the IMA to disclose industry costs were “pure farce at the consumers’ expense”.

Mr Clunie, a former senior lecturer in finance at the University of Edinburgh between 2003 and 2007 and an honorary professor at the institution, has also pointed to a recent US-based study that has also called into question the scale of trading costs.

Chicago’s Booth School of Business in December 2012 concluded that actual trading costs at investment firm AQR Capital Management were a fraction of the level previously expected by experts.

Mr Clunie added that he planned to publish a paper on his findings, once his 12-month data collection was complete and he has been able to review the findings with his University of Edinburgh peers.

He said it was unclear why trading costs on his and the AQR funds had proved to be significantly lower than expected.

One reason could be that market conditions and the costs associated with buying and selling shares have changed in the years since the other studies concluded, he said.

The Edelen research was based on the performance of US mutual funds between 1995 and 2006, while another key report by the Plexus Group on the issue was conducted in 2005.

He also theorised that the type of trades he is putting in place on his fund, which aims to deliver positive returns regardless of market conditions, are “unusual”, given that he generally makes contrarian trades. He said it could also emerge that Jupiter’s trading execution team is simply performing well.