Research into the 'hidden charges' of owning certain open-ended funds has revealed the high-profile Woodford Equity Income fund to be among the funds with the greatest level of previously undisclosed charges.
Under the Mifid II regulations, firms are required from January 2018 to disclose the transaction costs paid by investors in funds.
The European rules means funds houses are no longer able to combine the cost of research with trading commissions and must pay directly for analyst research and make the cost plain in investors' charges.
Consultancy firm the Lang Cat examined the 20 best selling open-ended funds of 2016, and found the range of transaction costs vary from 0.66 per cent more than previously declared on the £968m JP Morgan Global Macro Opportunities fund, to 0.01 per cent more than previously declared on the £4.85bn Lindsell Train Global Equity fund.
The £10bn CF Woodford Equity Income fund has an extra 0.28 per cent of transaction charges on top of the 0.75 per cent of ongoing charges, a difference of more than 37 per cent.
The extra charges are not new on any of these funds, they just didn't previously have to be declared.
Funds which change the portfolio holdings more often will have greater transaction costs.
This is reflected in the very low transaction costs of the Lindsell Train fund, as manager Nick Train has frequently highlighted the long-term nature of his investment style.
The same applies to the £13.8bn Fundsmith Equity fund, run by Terry Smith, which has transaction costs of 0.05, though the previously declared charge of 1.05 per cent, was deemed to be greater than is typical for funds in the IA Global sector.
Passive funds also feature in the Lang Cat's research, with the Vanguard Life Strategy 60 per cent Equity fund actually costing investors 0.33 per cent in total, compared with the 0.22 per cent previously declared.
Mike Barrett, consulting director at the Lang Cat, said: "No-one's charges have actually gone up.
"Investors have always been paying these fees,. It is just that the fund groups now have to tell you what they are charging.
"Most of the top 20 best-selling funds are delivering good returns. Advisers and investors will make their own value judgement, and we suspect many will continue to conclude that their investments are value for money.
"However, it feels a bit grubby. Most advisers knew there was more to fund costs than the OCF (which represents the ongoing costs to the funds, which includes the annual management charge and other charges for services such as keeping a register of investors, calculating the price of the fund's units or shares and keeping the fund's assets safe) showed.
"However in the absence of formal disclosure this was just speculation, and they had to work with what the fund groups told them. From an investors point of view, it is likely to be a real turn-off.
"Numerous surveys over recent years have shown how people trust financial services at roughly the levels normally reserved for politicians and estate agents. And with fund groups now saying 'Oh, sorry, when we said we were charging you X, we meant a figure over a third higher', it is not hard to understand why.
"This feeling of grubbiness is compounded when you remember just how hard it has been for the industry to step up to the plate and make these changes.
"This is not anything radical – all they are being asked to do is to tell people what it costs to invest with them. It has taken EU regulation to get this out in the open, rather than transparency being a rule of thumb."
david.thorpe@ft.com
