Q. I keep reading that Fund Managers have “hidden fees” that can reduce the performance of their fund.
As I thought all charges had to be divulged to the investor, what’s all this about?
A. Yes, there has been quite a few articles on this recently in the press. One of which we read the other day was by Fidelity, a large fund management company.
What they are really getting at is that most investors are aware of the Annual Management Charge (AMC). However, they are usually not aware of other costs such as dealing charges.
Very simply, the more a fund manager buys & sells shares, the higher the dealing costs are.
This is very much what we find when we look at the what is called the Portfolio Turnover Rate (PTR) of an actively managed fund.
Commonly this can add an extra 1% to 3% pa in costs.
This means that the fund manager really has his work cut out to outperform the index, which is usually how the fund is judged.
One of the reasons why you have been reading about these issues lately is the popularity of passive and index funds (also known as trackers).
The annual total costs on this type of fund are usually much lower and this has meant that the spotlight has turned on the many underperforming active fund managers.
All investors need to be aware of all the different costs when they invest and this is what Fidelity appears to be saying. Their article recommends that costs should be explicit and split into five areas:
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Investment management charge
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Service & Administration charges
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Advice or distribution
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Platform charge
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Dealings costs
Another supporter of full transparency, Alan Miller, who is a former active fund manager and who now believes in trackers and passive funds, has even launched a petition. You can find this here.
