Jeff Prestridge  

Enough of the navel gazing

Jeff Prestridge

Jeff Prestridge

To put these figures into context, the average passive fund now levies an annual fee ranging between 0.15 per cent (US large caps) and 0.37 per cent (global emerging markets).

You could argue that the gulf between active and passive fund charges remains too large and that it should be closed. Absolutely.

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For a start, some fund managers need to take a knife to administration fees – a component of the ongoing annual fee.

This is a point expertly made in a recent article in The Sunday Times that highlighted the disparity in admin fees levied by individual funds, based on analysis by Justin Modray of Candid Financial Advice. On any level, some of the fees being charged are unjustifiable.

Also, as Morningstar’s report highlights, too many investors remain in ‘legacy’ share classes, resulting in them paying more in annual fees than they would if in a new style ‘clean’ share class devoid of adviser or platform fees.

Yet, as Morningstar concludes: “There is no doubt that the RDR has influenced the marketplace in a good way. There is greater transparency of fees for the investor and this has brought to the fore the issue of the assessment of value at a fund level.”

I think the investment fund industry needs to take a leaf out of the investment trust industry. In recent years, the boards of many investment trusts have demanded better value for money from the incumbent managers.

In some instances, managers have been replaced. In the vast majority of cases, charges have been reduced.

What has become the norm in investment trust circles is for the managers to lower their percentage fee once a trust’s assets strike through a certain threshold.

So, for example, they will levy a 0.7 per cent charge on assets up to £500m and then 0.6 per cent on any surplus.

This seems a fairer deal for all concerned: the trust’s shareholders and the investment managers.

Although I may be missing a trick, surely such tiered charges could equally be applied to unit trusts and open-ended investment companies. Maybe an issue that the Investment Association could look at in between bouts of navel gazing.

Jeff Prestridge is personal finance editor of the Mail on Sunday