Investors in funds such as Oeics and unit trusts are lashing out at rules introduced by the Financial Services Authority, which are allowing fund management groups to scrap maximum limits on fund charges, raising fears that further fee rises are on the way.
The protests from investors are becoming more public as they face steady increases in annual management charges for investing in open-ended funds. According to Lipper Fitzrovia, total expense ratios, which measure the annual drag of fees on performance, on equity funds have risen from 1.42 per cent in 2000 to 1.55 per cent last year.
The average initial charge for open-ended funds stands at about 5 per cent and the average yearly management charge at 1.5 per cent, according to the Investment Management Association.
The scrapping of maximum limits, which advisers say typically cap annual charges at 2 per cent, raises a longer term possibility that some funds might increase their yearly management charges to more than 2 per cent.
“It’s against investors’ best interests as raising charges drags down performance. We would much rather see managers introduce sensible performance-related annual fees rather than simply hike fees to pocket more money for no extra effort,” says Justin Modray, an adviser with Bestinvest, a firm of financial advisers.
“It’s a general trend that charges are going up for Oeics and trusts and that’s very prejudicial for investors,” says Roger Lawson, spokesman for the UK Shareholders’ Association, which represents private shareholders. “There are too many small funds and FSA regulations are putting extra costs on fund managers.”
Under the FSA’s book of rules, known as its New Collective Investment Schemes Source book, fund houses will no longer be required to disclose a maximum limit, which previously was set at their discretion. However, to move to this more relaxed charging basis, fund houses must first seek shareholder approval. If approved, fund management groups will then be required to give shareholders just 60 days’ notice of any fee rises.
One of the latest fund houses to respond to the changes in FSA regulations is Smith & Williamson. Toby Keynes, a shareholder who also serves as national secretary of the UK Shareholders Association, said he would vote against the changes at the group’s extraordinary general meeting in mid-December. “I don’t see how this particular change can be in our best interests,”he said. “Of course, unitholders could sell their holdings if they were concerned [about a possible rise in fees], but that will result in a high direct cost because of the difference between buying and selling prices and could also have major tax implications for the unit holder,” he added.
Karen Barrow, a director at Smith & Williamson, said the proposals laid out to shareholders were just a step taken to “follow the FSA guidelines”.
“We’re just following the FSA guidelines and this presumably, is what everyone else is doing. The previous maximum level was a ‘rule with no teeth’,” Barrow said.
Since the FSA revised its guidance on fee disclosure in April 2004, a number of the big fund houses, including Invesco Perpetual, Investec, Credit Suisse, Henderson, M&G, Baring and Threadneedle, have moved to raise their annual charges.
In October 2004, Invesco Perpetual increased the annual charge on four of its funds from 1.25 per cent to 1.5 per cent. This resulted in an estimated increase in annual revenue of £22.5m, according to Justin Modray of Bestinvest.
Credit Suisse raised the annual charge of its Income and Monthly Income funds from 1.25 per cent to 1.5 per cent, generating an estimated £4m increase in annual revenue.
