Are fund charges eating into your returns?

Types of investment

Are fund charges eating into your returns?

By Michael Trudeau

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Are fund charges eating into your returns?

Learn about the long-term effect of fund charges on your investment returns.

If you’re an investor with investment funds, such as unit trusts and open-ended investment companies (Oeics), your primary concern will probably be the performance of your investments. 

However, share prices aren’t all you should be worrying about – the charges you have to pay your fund managers can have a significant impact on your returns.

So what are the charges you face as a fund investor and how can you make sure you’re getting value for money?

What investment fund charges will you face?

Funds levy an annual management charge (AMC) from which they make their profits and cover the ongoing annual costs of running the fund. The AMC is typically made up of a number of different costs and averages around 0.75% in most actively managed funds. 

The charge differs from fund to fund but, generally, the funds that invest in riskier assets, like equities and property, will have higher AMCs than their lower-risk counterparts, such as corporate bonds and gilts. But the AMC is not the total cost you pay on a yearly basis.

What is the ongoing fund charge?

A more realistic indication of the true annual cost is a measure called the ongoing charge figure (OCF). This includes the AMC, as well as a number of additional costs such as trustee and auditor fees, that are taken directly out of the fund. These extra charges can easily amount to around 0.1% on top of the AMC. 

Fund managers are legally obliged to show the ongoing charge in their fund literature and they must publish it once a year. It can be found in a document called the Key Investor Information Document (KIID). 

How fund charges have changed

Traditionally, fund charges were even higher than they are now, as they were beefed up by commissions that were passed to financial advisers and investment brokers such as fund supermarkets. The typical AMC in the old world was 1.5%.

However, new rules introduced in 2014 made fund charges more transparent, which in turn has seen some funds get cheaper. 

The charges for investing are now split between the funds and the people that sell them. Fund managers charge you one fee, and financial advisers and brokers charge you another.

So, a fund's annual management charge could now be 0.75%. If you take financial advice, you'd then pay a separate fee to a financial adviser and another to the website through which it buys investments on your behalf.

If you don't take advice, you pay a separate fee to the broker through which you buy your funds. This could be a percentage of the amount invested or a flat fee. Initial charges, mostly, are no longer applicable.

Find out more: Fund supermarkets reviewed – compare the charges of leading brokers

Other costs of investment funds

While for the time being the ongoing charge is a good indicator of annual charges, it’s, unfortunately, not the whole picture. The transactions that fund managers undertake within their funds – the buying and selling of different assets – all incur costs, like trading fees, commissions and stamp duty reserve tax (on UK shares). 

Regulators carried out a study into this in 2005 and found that an annual turnover rate of 100% (all assets in the portfolio had been bought and sold in one year) would cost you an extra 1.8%. Add that to the average ongoing charge of 0.85% and you're looking at annual costs of more than 2.5%. Of course, the trades taken by the fund could boost your returns by even more, and a good manager wouldn't spend money on the trades without thinking it would enhance performance. 

Some unit trusts and OEICs, and many investment trusts, also levy additional performance fees on top of the regular annual charges – typically taking an extra 20% of everything above a certain level of performance. 

The argument for this is that they align the interests of the manager with that of the investor, but it’s important you check to see if there's a performance fee levied and that you fully understand when it’s triggered before you invest.

  • Last updated: February 2016
  • Updated by: Michael Trudeau