If you lived in the US, you’d probably be paying less today to invest in the stock market through investment funds than you did five years ago.
But for people living in the UK the reverse is the case. Fund charges on this side of the Atlantic tend to be higher than in the US. And rather than falling, they are rising. This week Baring Asset Management said savers in its Japan Growth, Korea and Eastern funds would face a 20 per cent rise in the fees they pay every year.
The disclosure comes after the announcement that Credit Suisse Asset Management and Threadneedle, two of Britain’s biggest fund managers, are also raising the annual fees on some of their funds by 20 per cent, affecting more than 100,000 investors.
The groups blame the higher cost of distributing funds and increasing regulatory expenses. Like Baring, they also said they were bringing prices into line with market norms. In most of these cases, annual management charges are rising to 1.5 per cent.
In the US however, some major companies have cut fees. Vanguard, the second-
biggest US fund group, last week cut charges to 0.09 per cent on some of its tracker funds which seek to mirror the performance of stock market indices. The fall came after Fidelity, a leading US fund manager, last year reduced fees on some of its trackers.
Naturally, active funds cost more than trackers but these recent changes bear out a longer trend in which American investors tend to pay less while Britons generally face higher fees. The average cost of an equity fund on sale in the US has fallen from 1.35 per cent in 2000 to 1.25 per cent in 2003, according to the Investment Company Institute, a US trade association.
By contrast, the average fee for UK savers who invest in an equity fund has gone up slightly in the four years to 2004, from 1.59 per cent in October 2002 to 1.62 per cent in October 2004, according to Fitzrovia, a data company owned by Reuters.
These rises may sound small, but the increases at Credit Suisse Asset Management mean an investor with a typical £30,000 holding would pay an additional £1,540 in fees over the life of a 10-year investment, according to Fitzrovia. It assumed stock markets would return 7.5 per cent a year, the estimate provided by PwC, the professional services firm, to the Financial Services Authority in summer 2003.
Charges are particularly important because returns are expected to be lower than during the 1990s bull market, say certified financial planners.
“The greater the charges, the better your investment has to perform to provide the returns you need,” says Julie Lord, managing director at Cavendish Financial Management.
Other advisers say the big difference is that the US has a significant number of financial advisers who charge a fee which aligns their interests with the clients. These US advisers can recommend low-charging funds to customers.
There are more than 48,000 fee-charging US certified financial planners, compared with about 440 in the UK, where financial advisers largely take commissions. In the UK, a strong commission-based culture has seen many fund management groups build 0.5 per cent annual “renewal” commissions into their charging structures.
“The American market works more competitively whereas the UK is dominated by the commission-based advice system,” explains Ian Shipway, president of the Institute of Financial Planning, a trade body for certified financial planners.
But asset managers say comparisons with the US are misleading because the size of the US fund market enables companies to reduce charges. “The economies of scale in the US mean that groups can cut fees,” argues Richard Wastcoat, managing director of Fidelity in the UK.
Professional advisers make a similar point. Pars Purewal, UK investment management leader at PwC, the professional services firm, says the average fund in the US is three times bigger than its counterpart in the UK and continental Europe. Some costs do not go up proportionately when a fund gets bigger. For example, it does not cost three times as much to audit a £1bn fund as it does to crunch the numbers of a fund a third the size.
Regulators are starting to recognise the importance of making costs clear to investors. The Financial Services Authority this week said it would force asset management groups to publish in fund “prospectuses” a total expense ratio showing fund costs. The watchdog will also require publication of a portfolio turnover rate, making it easier to gauge dealing costs. Both reforms apply to funds such as unit trusts and open-ended investment companies marketed across Europe.
Other fund managers argue investors buy on performance not price, and that it is performance that determines whether they are getting value for money.
Bob Yerbury, chief executive at Invesco Perpetual, a fund manager owned by Amvescap, the US asset management group, says: “If all we are doing is providing index returns, we are not adding value. If we are beating the index by two, three or four per cent a year, then we are adding value.”
He argues that buying tracker funds exposes investors to significant risks because they mimic indices in which a few companies account for a large proportion of the weighting. “Products are typically not sold on price but performance,” Yerbury says.
However that could change as investors react to lower returns and charges taking a larger chunk out of performance.
“The 1.5 per cent a year when annualised returns were 15 per cent was not a significant issue. But when performance is 5-7 per cent a year, it becomes more of an issue,” Yerbury concedes. “If long-term returns are going to be lower, competition will limit price increases.”
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