Q. You recently covered the impact of investment charges that all investors face when they put their money into funds within personal pensions and investment based Individual Savings Accounts.
What are these costs and where can I find out more about them for the funds that I invest in?
A. Investment costs/charges is certainly a ‘hot topic’! In fact, this very topic was discussed in detail during a recent episode of the BBC’s MoneyBox.
The first thing to say of course, is that the costs apply regardless of how you hold the funds that you invest in, i.e. you pay costs that are held in an ISA as well as in a Unit Trust held outside of an ISA.
On a typical fund, the costs are:
- Annual Management Charge, paid to the fund management company, can range between 0.1% to 2% pa
- Total Expenses Ratio, includes legal fees, auditor fees and other operational expenses of the fund, can typically range between 0.1 to 0.4% pa
- Portfolio Turnover Rate, which is a measure of how frequently assets within a fund are bought and sold by the managers, the range can vary – the average costs added to a fund is 1.3% pa (Source: Financial Services Authority Occasional Paper 6).
The first two should be relatively easy to find. You will usually find the information on a fund fact sheet or you can ask the fund manager directly.
The Portfolio Turnover Rate can be a little harder to track down (and they are not published for pension funds). You can ask the fund manager where you can find it – it will usually be available in what is known as the ‘Simplified Prospectus’.
Unfortunately, the Simplified Prospectus is in the process of being phased out and with it’s successor, the Key Investor Information Document (will be introduced by July 2012 for all funds), fund management companies will NOT be required to disclose the Portfolio Turnover Rate.
We believe this is a step backwards as it will allow fund management companies to be less transparent about the true running costs of their funds.
Of course, it could be argued that charges are less important if the fund managers concerned are providing their investors with the sort of returns that make the charges an afterthought.
Unfortunately, many funds do not even beat the benchmark (which could be the market index) that they are compared against on a consistent basis.
This has been covered many times by various journalists, such as Paul Farrow who is personal finance editor at the Telegraph Media Group and discussed this in 2010.