Dubious claims: There's no such thing as hidden fund fees
“Are hidden fees the Loch Ness Monster of the investment world?” asked a recent press release from the Investment Association (IA).
The industry group representing fund managers claimed to have proof that stealth charges on investment funds are a non-existent threat.
Sadly, the claim was based on severely flawed research. The first page of the report admitted that the study used a time period that was very flattering to actively managed funds, and more importantly, that the report had ignored some of the hidden costs of investing because the IA didn’t have a way to measure them!
All the study really proves is that during the four-year period in question, actively managed funds performed well enough to cover their transaction costs, and then some.
That growth spurt was mainly down to subtle differences between fund managers’ portfolios and the benchmarks they compare themselves against, as funds tend to invest more in smaller companies than the index would suggest.
Between 2012 and 2015, these smaller businesses soared compared to bigger firms, boosting returns for actively managed funds. During that time, the FTSE All-Share index, which tracks performance of large, medium and small companies listed on the London Stock Exchange, rose by 39%. But over the same period, the FTSE 250 index, which tracks the UK’s mid-sized businesses, rocketed by 92%.
That’s good news for investors in those funds, but it doesn’t mean we should forget about hidden fees.
In fact, tucked away in the report is the admission that for UK equity funds, these dealing charges will erode 0.3% of investors’ returns every year, though that depends how often the managers buy and sell shares.
In its defence, the IA is planning to introduce new reporting standards that make it easier to measure these hidden transaction costs.
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.