How do you calculate a fund's performance if you factor in annual fees?

17 January 2018


I would like to know how to interpret a fund’s performance chart while factoring in fees. For example, if £100 is invested and the fund performance is 10% for the year, does that mean my £100 becomes £110? If, say, the annual fee is 1%, does that mean my investment is now £110 minus £1.10 (annual fee), so £108.90. I have read your advice about checking the fees for funds and have seen funds quoted at gains of say 4% a year with fees of 0.5%, which to my mind is not a good investment. 



A fund’s quoted past performance figures are shown after its charges have been deducted. In this instance, if the fund has a quoted performance of 10%, then an investment of £100 should increase to £110. 

However, projections for future performance often use standard rates of return where charges haven’t been included. Charges are then deducted afterwards so that the projected performance of one fund will be different from that of another if it has different levels of charges.

As you point out, these projections can make funds look like poor investments if a low rate of return is assumed and the fund has high charges. For actively managed funds, as opposed to passive funds like trackers, you can expect the charges to be significantly more than 0.5% a year.

The transparency of charges is a wider issue. While investment funds have to disclose charges and include an ongoing charges figure (OCF), this figure doesn’t include all of the charges that are paid within the fund. It doesn’t, for example, include transaction charges within the fund.

The Financial Conduct Authority, the industry regulator, is pressing investment companies to be more transparent. In June, it published the Asset Management Market Study, which, among other areas, recommended improvements in how companies report fund performance and how they disclose their charges. 

Patrick Connolly is a certified financial planner at Chase de VereFind out who our experts are on the Ask the Experts homepage.

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