How to safeguard your cash from fund managers' fees
By
Paul Amery Dec 23, 2011
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Over the last decade, mutual funds have grown by around £300bn in assets, says David Norman of TCF Investment, a fund management group. With that huge inflow of cash, you’d assume that economies of scale would have driven down the average cost of running a fund. They haven’t. Ten years ago the average total expense ratio (TER) of a mutual fund was 1.55% a year, says Norman. Today it’s 1.7%. That’s despite the fact that the costs of dealing in the underlying shares and bonds have fallen. Compare fund management with the bookselling business and the impact of gigantic e-retailers such as Amazon, says Norman. Would anyone believe you if you said that books should cost more now than in the days when they were only sold in shops?
Of course not. So what’s gone wrong? Fund management has become a gigantic sales and marketing machine, designed to skim off as much cash as possible, says Norman. Many funds have forgotten their original job description: to pool investors’ cash and look after it carefully.
But there are signs that investors are learning and are moving into alternatives that offer better value for money. Despite Europe’s woes, cheaper, passively-run exchange-traded funds (ETFs) have continued to attract money in 2011. Active funds, meanwhile, saw investors pull out €60bn in the first ten months of the year, says research firm Lipper.
It’s a good thing too. Stagnant global stockmarkets have made it more vital than ever to keep fund costs down. With most major markets still below where they were in 2000, investors have had to rely on dividend income to make any positive returns at all, even before accounting for inflation. If you add in the impact of portfolio turnover, costs rise still further. A 100% annual turnover rate in a UK equity fund can be expected to add around 1% a year to expenses. Yet trading costs are not included in the TER, even if they eat into your capital.
So how can you safeguard your cash? Whether you choose an active fund or a passive tracker, work out your total cost of ownership. Check the TER, try to find out what the fund’s internal turnover is likely to be, assume a related cost and add it on. Factor in platform charges (eg, your pension provider’s fees) and some brokerage commissions for occasional fund rebalancing. Do this, and you’ll be set up for much better returns over the next decade.
• Paul Amery edits
www.indexuniverse.eu
, the top source of news and analyses on Europe’s ETF and index-fund market.
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