Investment Association refutes hidden fund fees

The Investment Association has released an analysis of fund returns, which it says calls into question the existence of hidden fees lurking in investment funds.

Investment Association refutes hidden fund fees

The IA analysis shows returns of equity funds against their benchmark indices over the past three years and concludes there is no evidence of hidden charges.

Commenting, Laith Khalaf, senior analyst at Hargreaves Lansdown, said: “The debate over charges has undoubtedly been characterised by exaggerated and sometimes baseless claims, but at its root there is an issue over the disclosure of charges which the funds industry needs to get to grips with.”

The problem lies in the transactional charges incurred by funds which appear in the annual reports and accounts, but don’t appear in the Ongoing Charges Figure disclosed by funds on their factsheets.

“There is a genuine question over the correct presentation of these charges, because they are variable, and so an annual calculation may give a misleading impression of the regular costs to investors,” said Khalaf.

“Events like manager changes and extreme fund flows can create spikes in turnover and transaction costs, despite being non-recurring by nature. The Investment Association is consulting later this year on standardising disclosure of such costs.”

Khalaf said transaction charges are an important factor in returns, but most fund managers are rewarded based on their performance so won’t trade unless they believe it will be of benefit to investors. The issue is therefore one of disclosure rather than misplaced incentives.

“Explicit costs are important too, and this is something we have been taking the fund management industry to task on,” he said. “Investors must also take performance into account when choosing a fund; in reality the dispersion of returns is much more heavily influenced by manager skill than charges.

“Over the last 10 years the best performing UK stock market fund has returned 12.7% a year, the worst has returned just 1.2%.”

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