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High fund charges result in lower performance

New research suggests large fees hit returns
Fees affect performance

The cost of your investment fund should be a key consideration

High charging investment funds produce poorer returns than their lower cost counterparts, new research from TCF Investment has revealed.

The fund managers analysed the performance of seven investment sectors over three and five years, finding that, on average, the cheapest 25% of funds produced better returns than the most expensive 25%.

High cost, poor performance

TCF looked at the Active, Cautious and Balanced Managed investment sectors (home to funds which invest in a range of different assets, like shares, bonds and property), as well as the UK Equity Income, UK All Companies, Global Growth and Corporate Bond sectors.

In the Active sector, it found that over three years the most expensive funds produced an annual return of 5.2%, while the cheapest funds paid out 6.36%. Over five years, the high cost funds paid out 3.52% a year, compared to 4.59% for the lower cost funds. The results are shown in the table below.

How fund fees affect future performance
  Annual return over:
  3 years (%) 5 years (%)
Active Managed sector
Cheapest funds 6.36 4.59
Dearest funds 5.2 3.52
Difference 1.15 1.08
Balanced Managed sector
Cheapest funds 6.26 3.94
Dearest funds 5.16 3.04
Difference 1.1 0.9
Cautious Managed sector
Cheapest funds 5.05 2.9
Dearest funds 5.05 2.31
Difference 0 0.59
UK Equity Income
Cheapest funds 7.45 2.8
Dearest funds 7.09 1.93
Difference 0.36 0.87
Global Growth
Cheapest funds 7.84 5.49
Dearest funds 5.77 3.51
Difference 2.07 1.98
UK All Companies (a)
Cheapest funds 6.88 3.55
Dearest funds 5.95 2.61
Difference 0.93 0.94
Corporate Bond
Cheapest funds 7.46 3.47
Dearest funds 6.25 2.92
Difference 1.21 0.55

Table notes

  1. Only includes funds with using the FTSE All Share as a benchmark
  2. Source: TCF Investment. Data accurate to 31/07/2011


David Norman at TCF said: ‘The truth is that cost is an extremely strong predictor of future relative performance and yet the industry does its best to hide this from the investor and his or her adviser.

‘Investors and advisers need to remember that every pound of investment cost is a pound lost – forever. In the current low return environment high costs means investors are effectively trying to walk up the down escalator – a sure fire way to get nowhere fast.’

Costs matter

The study suggests a strong link between the fees charged by investment funds and their long-term performance. Which? Money investment expert Gareth Shaw believes that fund charges should play an important part in the decision you make when investing in funds. 

He said: ‘Fees should be a strong consideration when you invest. Unfortunately for investors, though, this doesn’t necessarily mean that the very cheapest fund will guarantee you the best return, while some high charging funds can deliver top performance. 

‘But a high charging fund faces an uphill struggle to beat what it charges and then deliver a good return to you on top. And knowing that most fund managers struggle to deliver good returns consistently, it’s often difficult for investors to judge whether or not they’re getting good value for money when paying these fees.’

Cut the costs of investing

You can cut the cost of investment funds significantly. Tracker funds, which follow the performance of the stock market, can charge less than 0.3% a year, over five times less than some of the funds run by managers. You can learn more about the difference between these funds in our active vs. passive investment guide.

If you want to put your faith in a fund manager, investing through a discount broker can reduce charges. Through the likes of Alliance Trust or Cavendish Online, you pay no initial fees (typically 5% of your investment) and can cut around 0.5% from your annual fees. However, these should only be used by consumers who are confident enough to manage their own investments. Everyone else should seek independent financial advice before investing their money.

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