Ongoing charge fund figures could rise by almost 30 per cent

An 'all-in-one' fund charge, rolling trading costs into the headline annual charge, is one of several remedies being proposed by the Financial Conduct Authority (FCA) to address 'weak' competition in the asset management industry.

The findings of the FCA’s long-anticipated market study into the industry are expected to be released in the coming weeks, and if transaction costs are included inside the ongoing charge figure (OCF), then the OCF will inevitably rise.

The question of how big OCFs will become when trading fees are also factored in has been a grey area for some time, due to the fact that they are not currently disclosed. In any case, given that some fund managers trade frequently while others rarely chop and change stocks, transaction costs would differ on a case-by-case basis.

Research by Fitz Partners, however, has estimated that on average trading costs will end up adding around 0.25 per cent to the OCF. Given that active funds typically have a clean share class costing around 0.85 per cent, this would push costs above 1 per cent, which would equate to an increase of 0.29 per cent.

According to Fitz Partners, currently 77 per cent of active funds (clean share class) in the UK all companies sector show OCFs under 1 per cent. But with the addition of transaction fees to OCFs, the firm has worked out that only 28 per cent of active funds in this sector would remain below a total fee ceiling of 1 per cent. In other words, two thirds of those with OCFs currently under 1 per cent would find their charge pushed above that ceiling.

However, the impact of trading costs on OCF is less than it would have been a few years ago. Fitz Partners notes that the average portfolio turnover of UK domiciled active equity funds stands at 52 per cent, compared to 59 per cent three years ago. Over the same time period, transaction fees decreased gradually from 0.25 per cent to 0.2 per cent.

Hugues Gillibert, Fitz Partners’ chief executive officer, says the decline is ‘a sign of further tightening of fund costs’. ‘Although these charges are not usually disclosed to investors, they would have an impact on overall fund performance and are monitored internally by asset managers,’ he adds. 

Clean funds – how they work

Investors who use an online broker, either directly or through a financial adviser, will now find themselves investing in commission-free funds via ‘clean’ share classes. They will pay a separate fee to their broker: either a fixed fee or one based on a percentage of their investment.

However, the commission ban does not apply where a financial adviser or self-directed investor buys assets directly through a fund management company rather than via a platform. Those who ‘go straight to the manufacturer’ in this way will still incur commission charges.

Similarly, investors already invested directly with a fund management company are not being moved into clean funds, as fund management groups are not required to transfer them. Yet in most cases switching from old-style commission share classes to new clean versions would be in the investors’ best interest, as the switch would usually result in them paying around a third of a percentage point less in fees overall when the fund charge and broker fee are factored in.

As things stand, those who invested directly with the fund group via an adviser still have commission (typically 0.5 per cent) paid to the adviser, even if they are no longer receiving any service. Directly invested self-directed investors, meanwhile, simply pay fees to the fund manager for non-existent advice.

One way to switch to clean share classes is to sell holdings and repurchase them via a platform. The problem with this approach is that capital gains tax may have to be paid on the sale of holdings not held in an Isa. The first £11,300 of capital gains each year is currently exempt from capital gains tax.

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