IA: Hidden fees are investment ‘Loch Ness Monster’

Using data from fund research firm Fitz Partners, a study from the IA has analysed explicit transaction costs, portfolio turnover rates and returns for 1,350 equity fund accounts, based on pre-RDR share classes which incorporated both adviser and platform fees.

The trade body noted that, given an average bundled ongoing charges figure (OCF) of 142 basis points (bps), and transaction costs of 17 bps, “one might expect fund returns to fall short of benchmark returns by 159bps - the sum of....the OCF and transaction costs”.

However in its publication, Investment Costs and Performance: Empirical Evidence of UK Fund Industry Delivery, the IA argued this was not the case.

“Contrary to this expectation, funds actually covered both ongoing charges and explicit transaction costs and delivered returns higher than that of the benchmark,” the report said.

The IA said its analysis also suggested “more challenging to quantify” implicit costs - such as the bid/offer spreads involved in trading a security - were not a significant drag on returns.

It added: “We are careful not to overinterpret this data, given that it is based on a transaction costs database which covers only the period from 2012 to 2015.

“However, the analysis offers strong empirical evidence of recent industry performance in the context of charges and transaction costs across a large sample of UK funds.”

The report follows research by the Transparency Task Force, published earlier this year, which suggested more than 100 different costs and charges were being applied to pensions and investments.

The IA, which said its own findings suggest hidden fees were in reality the “Loch Ness Monster of Investments”, also attempted to dispell fears that excessive churn in portfolios could be driving up costs.

“Our analysis of portfolio turnover rates also contradicts criticisms that fund managers overtrade and that the ensuing transaction costs are several multiples of disclosed charges,” the report said.

According to the research, the average portfolio turnover rate in equity funds over the period stood at 40 per cent.

Fitz Partners founder Hugues Gillibert said: “This research makes no judgement as to what could be considered the right level of fund fees or what could be qualified as cheap or expensive, but by taking into account all costs borne by the funds and in turn by the investors and its potential impact on funds returns, it measures the actual value added by performing asset managers and the unlikely presence of significant transaction costs.”

The IA added that its forthcoming disclosure code would standardise fee disclosure, including implicit cost estimates across all investment products. The trade body will launch a public consultation on the code later this year.