What does this show?
It’s a breakdown of the cost structure on the average UK open-ended equity fund, as calculated by Fitz Partners, a consultancy. The company surveyed charges on more than 20,000 funds across Europe and arranged them by category.
Don’t we know all this already?
The headline annual management charges, which are shown net of any rebates, are not a surprise. They range from about 0.80 per cent on US equity funds up to 1.0 per cent on emerging markets funds.
What is interesting is the rest of it, which is broken down into administration costs, custody and other operating expenses – together, the total expense ratio – and then brokerage costs.
What is brokerage?
It is the cost of executing trades on behalf of the fund. It will depend on the level of the cost of trading – typically, very low in developed markets such as the US, but rather higher in emerging markets or for less liquid asset classes – and the amount of trades made, often expressed as the “portfolio turnover”. It also includes any transaction taxes.
In all bar one of the sectors that Fitz examined, brokerage was the second-biggest expense after the fund manager’s own costs. For emerging markets funds, it added another 0.37 per cent to the annual cost. The overall average was 0.29 per cent.
Isn’t this all disclosed?
Hugues Gillibert, chief executive of Fitz, said that over the past 15 years, fund groups have gone from using just the annual management charge as a benchmark to “measuring every other cost in between”. Total expense ratios or “ongoing charges figures” typically include administration, legal and custody charges but not trading costs. It can still be difficult for investors to arrive at a figure for trading or brokerage costs independently; often it requires a trawl through a fund’s annual report.
The Investment Management Association, which represents the open-ended funds industry in the UK, is working towards a methodology that would show portfolio turnover in a format that investors will find easy to compare, and encouraging fund companies to use consistent measures for charges. But critics say it is moving too slowly.
What about investment trusts?
Much of the debate about costs has focused on the open-ended funds industry, but trusts also employ managers and incur trading costs. These are monitored by the board, which is independent of the portfolio managers. Trading costs are disclosed in the report and accounts, but not on the fact sheets. “You would expect investment companies in general to have lower trading costs because they are closed-ended,” said the Association of Investment Companies.