Four fees and charges you should watch for before buying funds
For more on funds read: Don't get ripped off when buying funds.
From zero to 5.5%. Darius McDermott, managing director of Chelsea Financial Services, says: "No one should be paying an upfront charge any more. This only tends to happen if you buy direct from the fund manager. You can have the charge rebated by going through a fund supermarket or discount broker."
Annual management charge (AMC)
Average 1.5%. It includes costs such as research, salaries, administration and trail commission to IFAs, and tends to be lower on a fixed-interest fund and higher on a speculative investment.
For more on AMCs, read: Performance at a price.
Neptune Russia, for example, charges 1.75%, which the manager justifies because of the higher cost of buying stocks in that region. A few brokers, such as Cavendish Online, rebate some or all of the AMC.
Total expense ratio (TER)
Average 1.6% for a UK equity fund. This may or may not be published in your documentation but can be up to double the AMC, so ask if you don't see it.
The TER includes stamp duty, auditors' fees, account dealing costs and the AMC. But watch out: 'total' can be a misnomer, as the cost of trading shares is not included and can add a further 1% to 1.5%.
Funds with high TERs include Psigma's European Income fund at 2.99% and Virgin's Climate Change fund at 3.49%. At the other end of the scale are the likes of Clerical Medical UK Growth with a TER of 1.05% and Schroder Gilt and Fixed Interest at 0.56%.
These are creeping into conventional funds, inspired by the incentives offered to hedge fund managers who are typically rewarded under the '2 and 20' rule: a 2% annual management charge plus 20% of annual returns. Managers try to achieve this by investing in and shorting shares (betting on share price falls).
Lipper figures show there are now 81 open-ended funds in the UK that apply performance fees, compared with just 34 funds at the end of 2007. These include the absolute return funds, which promise investors returns above zero whatever the state of the markets. They typically charge 1.5% annual fees and 20% of returns in excess of a minimum benchmark.
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
Total expense ratio
Most investment funds levy an initial charge for buying the units/shares and an annual management fee but other expenses also occur in running the fund (trading fees, legal fees, auditor fees, stamp duty and other operational expenses) which are passed on to the investor and so the TER gives a more accurate measure of the total costs of investing. The TER is especially relevant for funds of funds that have several layers of charges. Unfortunately, investment fund companies are not obliged to reveal TERs and many only publish the initial charges and annual management charge (AMC).
Usually charged as a percentage of returns for performance above a specified benchmark, such as an index. The fee can range from 10% to 20% of total investment returns on a low starting benchmark such as Libor and investors could find themselves paying extra fees for merely average performance. Note that these funds do not compensate investors when the manager underperforms the benchmark.
This is more usually a feature of car insurance but it can also crop up in contents, mobile phone and pet insurance policies. An excess is the amount of money you have to pay before the insurance company starts paying out. The excess makes up the first part of a claim, so if your excess is £100 and your claim is for £500, you would pay the first £100 and the insurer the remaining £400. Many online insures let you set your own excess, but the lower the excess, the more expensive the premium will be.
Annual management charge
If you put money in an investment or pension fund, you’ll not only pay a fee when you initially invest (see Allocation Rate) but also a fee every year based on a percentage of the money the fund manages on your behalf. Known as the AMC, the actual percentage varies according to the particular fund, but the industry average for active managed funds is 1.5%.
A standard by which something is measured, usually the performance of investment funds against a specified index, such as the FTSE All-Share. Active fund managers look to outperform their benchmark index. Cautious fund managers aim to hold roughly the same proportion of each constituent as the benchmark, while a manager who deviates away from investing in the benchmark index’s constituents has a better chance of outperforming (or underperforming) the index.
Absolute return funds
Absolute return funds aim to deliver a positive (or ‘absolute’) return every year regardless of what happens in the stockmarket. Unlike traditional funds, they can take bets on shares falling, as well as rising. This is not to say they can’t fall in value; they do. However, over the years, they should have less volatile performance than traditional funds.
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.