Basing fund choice decisions on cost alone will not achieve the best outcome, since many top-performing funds have higher fees, a study has suggested.
Analysis by Chelsea Financial Services showed 95 per cent of the top-performing funds have charges of more than 0.7 per cent, which may be problematic if investors are choosing their funds on charges alone.
A recent consultation by the FCA showed that, when presented with a warning about the impact of fees and charges on their returns, investors tend to switch to cheaper funds.
Darius McDermott, managing director at Chelsea Financial Services, said fund houses must ensure they explain to customers how what they do makes their charges worthwhile.
He said: "Buying the cheapest fund is not going to result in the best consumer outcome.
"Fund houses are now being given the opportunity to evidence how they add value for money, and it is essential that they get this right.
"A consistent way to show this value would be best, so that investors can easily assess the advantages and base their decisions on more than cost alone."
| Chelsea analysed the 238 funds in the IA UK All Companies sector, which have a five-year track record, finding ongoing charges for these funds range from 0.06 per cent to 2.91 per cent. |
Four out of the top 10 performing funds have ongoing charges figure (OCFs) of greater than 1 per cent.
However, they outperformed the cheapest funds by some 127 per cent to 208 per cent over the five-year period.
On an investment of £10,000 this means additional returns worth some £5,500 to £8,500 after charges.
The study showed that three funds in the top quartile of the UK All Companies sector had ongoing charges of less than 0.7 per cent, with the best performing being Montanaro UK Income.
The other two were iShares Mid Cap UK Equity and HSBC FTSE 100 250 index.
However, the study also showed that price is no guarantee of good performance either.
In the bottom quartile funds in the sector, 34 out of 60 have an OCF of 1 per cent or more.
Mr McDermott said: "Could fund management costs be reduced further? Yes, they could. We have already seen a small number of companies take these steps – Baillie Gifford, for example.
"More companies could, and should, pass on their economies of scale to investors, but at the same time, investors need to understand that returns after charges are far more important than the level of fees alone."
Minesh Patel, managing director at EA Financial Solutions in London, said the Chelsea study made a very valid point.
He said: "Because of reporting on the industry, consumers are becoming obsessive about cost, and a more rounded perspective is needed.
"There needs to be more education about why some funds charge more, and whether they add value as at the moment all areas are too fee and change oriented."
rosie.murray-west@ft.com
