We name the funds with the steepest fees: is it ever worth paying over the odds?
Improved transparency in the investment funds industry has made it easier for cost-conscious investors to compare fees and charges before choosing where to put their money.
The rise of exchange traded funds and fund supermarkets in particular has helped increase competition and put pressure on providers to reduce their fees where possible. But not all funds seem to have responded to this pressure. We reveal the investment funds and trusts with the highest charges and consider whether they are worth paying extra for.
All performance figures quoted (and included in the tables) are after charges have been deducted.
Don’t discount charges
Charges matter because they eat into your returns. If a fund charges you 1% to invest, it needs to return at least 1% just for you to break even. As charges creep up, so too does the level of returns a fund needs to generate to stop you losing money.
Moreover, compounding means that over the long term a relatively high charge erodes the value of a fund dramatically. For example, £10,000 invested in a fund costing 0.5% and returning 6% a year would grow to just over £29,000 in 20 years. If that sum was instead put into a fund that returned the same amount but cost 1.5%, it would be worth just over £24,000 after 20 years. You would have spent more than £5,000 extra in fees.
Note that there is more to fees than just the annual management charge (AMC). On top of the fees of your fund manager and team of analysts, there are fees for research, buying and selling holdings, and administration, all of which are generally passed on to investors. If you are investing through a fund supermarket, you will also have to pay it an administration fee, adding to your outlay.
In this analysis, we use the ongoing charges figure (OCF), which can be found on a fund’s factsheet. Rob Morgan, an investment analyst at Charles Stanley, explains: “The OCF is an industry standard for measuring the annual cost of investing in a fund. It includes the fund manager’s charge (the AMC), the cost of investment management and administration, and other costs such as fees for custodians, regulators and auditors.” It does not, however, include trading costs.
The most expensive investment trust according to our figures is Global Resources Investment Trust, which has an OCF of 5.6%. The trust specialises in the natural resources sector, where it invests in emerging developers, including some unquoted firms.
David Hutchins, investment director at Global Resources, says: “Investing in unquoted assets is always going to cost more. It requires more effort, and you need to take advice and make sure you’re protected. It’s a high-risk, high-reward strategy, and I think investors recognise that they have to pay higher charges for exposure to these assets.”
Vehicles that focus on niche assets are likely to be among the more expensive investment products on the market. Investing in small and unlisted companies may require more research and legal work, and entail higher trading costs. The danger with funds invested in cyclical sectors such as commodities and natural resources is that they are prone to performance volatility, which can make it hard for them to justify their higher fees. That’s evident in the performance of Global Resources Investment Trust, which is down 58.7% over the past year.
JZ Capital Partners is another trust with exposure to potentially volatile assets. It focuses on US and European micro-cap companies, which can see significant swings in their share prices, and it also invests in US real estate.
Property is another asset class where charges can quickly mount up. While buying and selling company shares is a relatively cheap and quick exercise, buying a building usually isn’t. Regional REIT is the second most expensive trust in our table, with an OCF of 4.5%. It focuses on buying properties with a view to redeveloping them before letting them out to tenants. As a result, it has relatively high costs and a higher vacancy rate than many of its rivals.
Stephen Inglis, director of the trust, says it is at the higher end of the cost range among its peers because it does things differently. Moreover, he argues that a chunky dividend yield of 8% justifies the fund’s fees. The trust, which launched in 2014, is a second-quartile performer over the past year, having returned 4.6% against a sector average of 3%.
Share class factor
The charges open-ended funds make can be a little more complicated to judge because of the different share classes available to investors. Looking at the most expensive funds listed here, several fund managers point out that their fund’s high OCF relates to just one share class.
This means, in effect, that very few investors are paying higher charges. Moreover, so-called clean shares classes have been introduced since the Retail Distribution Review – which stopped funds paying big commissions to advisers who had recommended them – and investors have been gradually moved into these. It’s another factor investors need to watch out for when choosing a fund, as it is still possible to end up in a relatively expensive share class paying more than you might otherwise need to.
Other funds find themselves looking expensive because they are small. Charteris Property, for example, has less than £1 million of assets under management. Ian Williams, chairman of Charteris, explains that funds have a fixed cost base – which includes administration and custodian fees – that must be paid and will lead to a higher OCF on a small fund. As a fund increases its assets, the effect of paying these fixed charges is diluted, which helps reduce fees.
Several other new fund entrants are being affected in the same way, including the SC Davies Global Fixed Income fund, which has assets of £3.1 million, and the £2.3 million TC South River Gold and Precious Metals fund.
Ben Yearsley, a director at Shore Financial Planning, says: “Some investments are relatively expensive, as they are more labour-intensive to run or can’t scale up to help reduce fees (venture capital trusts, for example), but mainstream investments can’t really justify abnormally high charges.”
Multi-manager funds naturally tend to have higher charges. That’s because investors in such funds effectively pay two layers of management charges: the first to the manager running the multi-manager fund and the second to managers of the underlying funds it holds.
Rob Thorpe, head of UK intermediary at F&C Asset Management, says: “Investors should bear in mind that funds of funds are offering a service, because you’re outsourcing decision-making to a fund manager. We always look to negotiate [on fees], but if we believe a fund manager is particularly skilful, we are comfortable paying for that.”
There are two multi-manager funds on our list. The Jupiter Merlin Worldwide Portfolio fund has an OCF of 2.6% and the F&C MM Navigator Select fund’s OCF is just shy of that. Does their performance justify the higher price tag? The F&C fund is in the second quartile of its peer group over one and three years, having returned 15.4% over three years. The Jupiter fund lags its peer group over three years, but over one year it is in the second quartile, having returned 1.3%, compared with a sector average of 0.3%. It is one of just two funds in the list to deliver a positive return over the past year.
Price worth paying?
Investors should not rule out a fund with a higher fee immediately, but see the fee as sign that they should do a bit more research.
Consider whether the fund’s investment strategy or the asset class or region it specialises in is associated with higher charges, and analyse how the fund has performed over the long term. A fund that consistently beats its benchmark and outperforms its peers may be worth paying extra for. Yearsley says: “If a fund that you like has high fees, look back at its performance to see if it is consistently beating a relevant benchmark. If it isn’t, it’s probably not worth paying the price.”
Thorpe says: “There needs to be a discussion around value rather than just cost. We will always have one of the highest charges in our sector, because there aren’t many funds of funds in the group, but we have outperformed. If you want to invest in something with no cost attached, you will have to put your money in cash.”
Reading recent factsheets or manager commentary may be useful in determining if a charge is likely to fall. Morgan says: “It’s worth bearing in mind that an OCF is a backward-looking measure that is calculated using the past year’s costs. That means it is entirely possible that it could change quite significantly in the future, particularly if a fund rapidly increases or decreases in size.”