“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.
But one high figure comes as a surprise, given the focus on low portfolio turnover taken by the fund in question – Evenlode Income. All the details for equity products are outlined in Table 1.
There are often understandable reasons for incurring these costs. Artemis US Extended Alpha, with its figure of 0.61 per cent, may incur greater costs through a use of tactical short positions.
Jupiter UK Smaller Companies’ figure of 0.46 per cent may be related to the fact that small-cap stocks can have larger bid/offer spreads than more liquid shares, resulting in greater implicit costs, as explained in Box 1.
Despite his scepticism of how investors use the figures, Mr Stubbs notes: “Including trading costs within total fund management charges is useful, given the ability to highlight a true cost that is ultimately faced by the end investor.
“This is especially so if such extra trading, for example, might turn out to provide little marginal value to the end investor.”
Four of the five funds with the highest transaction costs all focus on equities, a finding that is perhaps unusual given that analysis from the Lang Cat and a separate look at Morningstar data suggests multi-asset funds often incur the highest trading charges.
Of those multi-asset vehicles captured by Money Management’s analysis, as detailed in Table 2, many have kept transaction costs relatively low. But in some cases these figures are large relative to ongoing charges. Vanguard’s LifeStrategy range, for example, has transaction costs of between 0.1 and 0.13 per cent, compared with OCFs of 0.22 per cent. Its overall charges remain well below competitors’.
Transaction costs on products from the Old Mutual Cirilium fund of funds range amount to zero, but ongoing charges of up to 1.73 per cent mean that the overall cost of investing in this franchise remains higher than for some others.
Mixed bag
