Asset managers are hiding £1.75bn in fees each year by not declaring portfolio turnover and transaction costs, claims SCM Direct.
The investment manager, which campaigns on charges transparency, says that hidden execution and research costs and transaction taxes amount to 0.38 per cent of fund assets a year on average.
SCM Direct has used the transaction costs released by Woodford Investment Management last week, when it revealed full charges and portfolio turnover for its funds.
Woodford’s costs amount to 0.09 per cent of fund assets with portfolio turnover on the Woodford Equity Income fund of 15.3 per cent.
SCM says that total assets in the UK-domiciled funds industry amount to £524.3bn, with 87.6 per cent of that sitting in active funds. Data from Fitz Partners shows the average portfolio turnover rate for funds is 64.7 per cent a year, giving the total cost of transaction fees.
Darius McDermott, managing director of FundCalibre, says the figure is based on rough calculations but that it is a plausible number.
However, Adrian Lowcock, head of investing at Axa Wealth, says that while the figure is not an unfair indicator of the industry, the calculation may be “a bit simplistic” as a way of estimating total costs.
“The calculation makes a pretty big assumption that a fund with a higher turnover will pay the same percentage of costs as a fund with lower turnover. This might not be the case, research for example might be more fixed and therefore falls as a proportion of turnover,” he says.
Gina Miller, founder of SCM Direct, says: “The fact that the average UK fund is not transparent or adding these costs to their published investment fees total is a travesty bordering on deceit. The FCA should act urgently to mandate that all funds show, in a format that is ‘fair, clear and not misleading’, full transaction costs and added to other ongoing charges.”
However, McDermott says the industry needs to focus less on costs and more on total returns.
“Can we stop focusing totally on charges. I think charges are important but there are lots and lots of good active fund managers who perform well after all these charges are included,” he says. “There is good active management and this continued bombardment of charges commentary is just noise.”
The portfolio turnover figure will also vary considerably between asset managers, says McDermott, with some fund managers such as Fundsmith’s Terry Smith using low turnover as a way to boost returns.
However, other fund managers have a shorter-term view of one to two years, and may have turnover of 100 per cent.
“I don’t care and I don’t mean to be flippant, as clearly charges are a hugely important issue. But we can find managers who after all these fees can consistently beat the benchmark and index and I think that’s the bigger story,” he says.
SCM says that now fund managers no longer have to publish the portfolio turnover of their funds it is increasingly difficult for investors to calculate transaction costs.
“It is a travesty that the UK regulator refuses to enforce a common template of all charges published at the point of sale … such a decision would allow consumers to easily compare one fund or most other forms of investment, with another,” says Miller.
Lowcock is also not convinced that transparency on costs will necessarily make funds any cheaper.
“On the whole I think we should encourage the industry to simplify charges and there has been some progress on this. Bringing in the transaction costs might not result in removal of the costs as some fund groups might raise their TCF to accommodate this,” he says.