This week’s post was initially going to tackle the somewhat intriguingly named subject of ‘helicopter money’ but as my editor struggled to understand even the first paragraph, let’s instead look at something a little less challenging, but above all very relevant to you as an investor: fund charges. By this I am referring to the charges levied by fund managers. They are a minefield and have provoked considerable comment in the press because we do not know nor are we told what exactly is included in the ‘charges’.

As a minimum you would expect that the buying and selling costs of the investments plus stamp duty would be included, as well as the fees associated with holding the securities in safe custody and the charge for the management (in effect, payment to the individual fund manager(s) for their skill). However, you then have questions such as the marketing costs of the fund, the legal costs, the accountancy costs of auditing, and external research and the problem is that different funds have different ways of dealing with these costs and there is therefore no consistency across the fund management industry. This in turn means that as an investor it is difficult to compare funds from a cost point of view.

Funds will generally quote a Management Charge (AMC) and an Ongoing Charges Figure (OCF), sometimes referred to as the Total Expense Ratio (TER). The AMC is just the charge for the management of the fund payable to the fund manager. The OCF includes a lot more charges but not necessarily all the associated costs. The Financial Express Trustnet website defines OCF as ‘expenses which include payments to the manager, the trustee, the custodian and their representatives. The figure also includes registration, regulatory, audit and legal fees, and the costs of distribution. The OCF is calculated by taking the sum of these expenses incurred in the last 12 months and dividing this by the average net assets of that class for the last 12 months. Performance fees, transaction costs, interest on borrowing, costs associated with derivatives, entry and exit fees and soft commissions are not included in the OCF calculation, and should be factored in separately by the investor.’ These latter fees are not easily obtainable, if at all, and so it is very difficult for the investor to calculate them – hence all the furore.

Some funds will quote a Management Charge (AMC) of 0.75% p.a. and an Ongoing Charges Figure (OCF) of 1.36% p.a., while at the other end of the scale a fund could have a management charge of 0.75% and an OCF of 0.89%p.a. Why is the OCF so low on the latter? Without having it spelt out it is extremely difficult to know. The other extreme examples of fund charges are Exchange Traded Funds (ETFs) and index tracker funds which, given that they are not actively managed, attract lower OCFs. These range from an OCF of 0.40% down to 0.07% – the low charge being part of the attraction of ETFs or trackers.

For you as an investor, it is important to consider fees because of their effects on performance. Let us compare two funds of £100,000 with average annual returns of 7% p.a. but one with an AMC of 0.5% and the other with an AMC of 1.0% p.a. These are the valuations of the investment after the following periods:

Effect of charges on £100,000 portfolio over different time periods.
Investment	£100,000.00
Rate of return	7.00%	before AMC not including other charges
Time period		5yrs	10yrs	20yrs	30yrs
Valuation of investment after deducting AMC	0.5% AMC	£137,008.67	£187,713.75	£352,364.51	£661,436.62
	1.0% AMC	£133,822.56	£179,084.77	£320,713.55	£574,349.12
Difference		£3,186.11	£8,628.98	£31,650.96	£87,087.50

 

You can see that the effect is significant. A difference of £8,628 after 10 years is a lot of money. Consider that in the case of a pension fund, where one could easily be invested for 30 years, and you are looking at a difference of £87,000. Although the difference is significant, one should not become too obsessed about charges and automatically go for the lowest charging funds; this table shows the effect that charges have, other things being equal. As I have discussed in a previous post, there are other issues to take into account when seeking a ‘good’ fund. Charges can, as the above table shows, have an important impact on the value of your investment pot, but when choosing your fund they need to be considered alongside other factors, such as historical performance, experience of the fund manager, investment choices (especially shares) and volatility.

Archiemidas
This article is not to be construed as financial advice. The views expressed above are those of the writer alone and do not constitute a recommendation to purchase, hold or sell. It must be borne in mind that the value of investments and any income will fluctuate. The value of your Investment can fall as well as rise and you may not get back the original amount invested. Past performance is not a guide to future returns.