The methods used to calculate fund transaction costs under the Markets in Financial Instruments Directive (Mifid II) lack common sense and mean much of the data provided to investors cannot be relied upon, according to an investment consultancy.
Bella Caridade-Ferreira, a partner at Fundscape, pointed out regulators provided two different methods of calculating transaction costs, which she said are "diametrically opposed" to each other.
The result, she said, is fund managers, authorised corporate directors (ACDs), data providers and platforms between them contributing to organisational chaos.
"Advisers have noticed that some platforms’ [transaction cost] numbers quoted online did not tally with data providers’," she said.
"Or they found that other platforms’ online numbers didn’t tie up with subsequent illustrations.
"And some platforms refused to use negative numbers because they would be counter-intuitive and likely therefore to be counter-productive.”
She added that negative transaction fees have attracted a significant amount of attention, but investors should "probably be more shocked" at the idea of zero transaction fees than negative ones.
"Every fund has trading activity through tax, liquidity and stock-broker commissions.
"However, some boutique managers are not sure their ACDs have calculated the numbers correctly, since they know they can’t be zero.”
Ms Caridade-Ferreira said much of the coverage around transaction costs has presented them as a hidden charge faced by investors, but she said this is not correct.
She said: “Transaction charges are not hidden charges with which to fleece investors nor are they a reason to point fingers at fund managers.
"High transaction costs do not equal bad funds; a cheaply priced index tracker, for example, is likely to have a higher proportion of transaction costs than an active fund," she said, giving the example from her research of the Vanguard LifeStrategy fund.
"Equally, there are two funds with particularly high transaction costs — one is a strong performer with three-year alpha and the other is not. Which fund would you recommend to your client? It’s wrong to look at transaction costs in isolation.”
The Association of Investment Companies have highlighted how investment trusts would typically have lower transaction costs as the fund manager doesn't have to trade in order to meet redemptions or to deploy inflows, unless new shares are issued.
David.Thorpe@ft.com
