IA criticised over ‘convenient’ hidden fee study time period
An Investment Association (IA) study which dismissed fears about hidden fund fees has drawn criticism for relying on a “convenient” time period and disregarding other factors which could skew its analysis.
The study, published this week, 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.
While the research found that funds “actually covered both ongoing charges and explicit transation costs and delivered returns higher than that of the benchmark”, SCM Direct founding partner Gina Miller suggested the time period used was “convenient” for such arguments.
“The period of analysis of 2012 to 2015 was a period in which mid-cap stocks performed well in most markets,” she said.
“Equally, so far in 2016 - conveniently ignored by the report - UK mid caps have fared badly versus larger peers, as have most UK active funds.”
SCM also criticised the report for “excluding” bid/offer spreads from its analysis, but the study did note that its findings suggested such costs were not a material drag on returns.
Ms Miller added that the report made “no mention whatsoever or attempted adjustment” to account for survivorship bias, whereby funds that perform well tend to grow while poor performers are often closed or merged with peers, causing them to disappear from performance data.
The IA report noted, however, that it does include “data from annual reports of open and closed, active and tracker funds across all IA sectors”.
Last year Investment Adviser reported that nearly half of all UK-domiciled open-ended funds available to investors a decade earlier had been closed or merged.
The IA has also acknowledged the limited time period in the research, noting: “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.”
While the period used may have been positive for UK mid caps, the IA analysis covers 16 equity sectors, which may have fared differently.
The IA’s research also found that the average portfolio turnover rate in equity funds over the period was 40 per cent, with the report noting this contradicted claims that “managers overtrade and that the ensuing transaction costs are several multiples of disclosed charges”.
However Andy Agathangelou, founding chair of the Transparency Task Force, questioned the methodology used here.
“There are perhaps 10 different portfolio turnover rate methodologies being used by the market,” he said.
“Every transaction incurs a cost to the investor, not just half of the buy or sell transactions. So what calculation methodology has been used when producing this research? Are the real portfolio turnover rates being underreported?”
The IA’s report said it used the methodology defined by the US Securities and Exchange Commission to calculate turnover rates. This calculates turnover as the ratio of the lesser of purchases or sales within a portfolio over the monthly average value of that portfolio.
