Mifid II  

The 'Loch Ness monster' rears its head for fund firms

  • Learn how transaction costs tend to be calculated
  • Grasp what these costs could amount to for some of the most popular funds
  • Comprehend the issues that stem from these new disclosures


There are plenty of other caveats to watch for, largely in the form of potential anomalies in the disclosures. One such phenomenon has come in the form of ‘negative’ transaction costs.

Four funds included in the sample list negative costs, with seven registering zero costs. This is typically due to most asset managers following the European Securities and Markets Authority’s recommendation to use the methodology required by the packaged retail and insurance-based investment products (Priips) regulation – a change that, like Mifid II, came into force at the start of January this year.

Further confusion arises from the fact that not all asset managers use this methodology. This has led many firms to suggest that figures are not directly comparable. However, the vast majority of those in Tables 1 and 2 do use the Priips calculations.

The difference between this methodology and old methods is that asset managers must include implicit costs in their calculations. The vast majority have adopted this methodology, though previously firms tended to focus solely on explicit costs.

The inclusion of implicit costs means that ‘slippage’ – a swift change in market prices between a trade being ordered and it being completed – counts towards reported transaction costs. For example, if a fund is selling shares at a set price, but this figure rises before the transaction completes, the estimated capital gain would be counted in transaction cost calculations and could lead to zero or negative figures.

This oddity has led to some platforms – in a bid to avoid client confusion – deciding to list costs as zero rather than reporting the negative numbers reported by some fund groups. But intermediaries themselves may still face the unwelcome task of attempting to report these negative figures to clients.

A key concern among investment specialists is that, while greater transparency could aid decision making, higher costs could equally dissuade retail investors from using funds that ultimately are best suited to meet their needs.

“I do not have confidence that the total charges figures will be fully analysed appropriately by investors in the context of the net expected returns,” says investment consultant Tim Stubbs. 

“Seeing a high number alone may lead many investors to stop their research there and then, which in some cases could prove to be a mistake.”

The breakdown

To illustrate the transaction costs incurred by different products, Money Management has assessed these charges across the most popular IA sectors.

The analysis, which includes the main equity, bond and multi-asset peer groups, looks at the three most popular funds of 2017 from each sector. The results show that transaction costs can vary significantly between different types of product.

Of the funds analysed here, the product with the highest figure – Old Mutual Asia Pacific – has 237 holdings. This may explain the significant level of transactions within the portfolio.