Think you get what you pay for when it comes to fund management? Think again. A study just published in The Sunday Telegraph shows that there is very little relationship between price and performance. Instead, many of the worst performers in the market charge fees well above the (already far too high) market average. This is the total expense ratio (TER), which typically eats up 1.6% of the value of your investment every year.
The worst culprits are multi-manager funds (where the fund invests only in other funds). Buy one of these and you’ll get to pay two sets of fees (one for your own fund manager and the other for all the funds bought on your behalf). In exchange you’ll get back almost guaranteed bad performance: of the 373 funds analysed, under 40 delivered above-average performance over one, three and five years.
High fees matter. Imagine you had been invested in a fund holding 50% in UK government bonds and 50% in UK shares over the last decade. If you’d paid no fees at all, says Evercore Pan Asset Capital Management, you would be up about 50%. If you’d been paying 1% a year you’d be up more like 37%. Make that a 2.5% fee (which is not uncommon) and you would look at a mere 18% return.
So why do we let the industry get away with charging the kind of fees that do such damage to our already generally paltry investment returns?
Partly it’s because we don’t always know how much we are really paying. The annual management fee is only the beginning. Investors also end up paying everything from stamp duty on share purchases to auditors fees, most of which come together to make up the TER.
But there is one more big cost that doesn’t even make it into the TER – dealing. Every time a manager trades, you pay. Clearly, managers have to trade but there is evidence to suggest that, while their costs go up with the frequency of their trading, their performance does not.
Not all expensive funds have done badly. One firm to emerge particularly well from The Sunday Telegraph study has been Threadneedle. It runs nine multi-manager portfolios, all of which have done very well over one, three and five years on TERs ranging from 1.53% to 1.8%. However, if you don’t fancy taking an expensive bet on fund manager performance, your best option is to go for a passive exchange-traded-fund (ETF) that tracks the performance of an index. The charges are more straightforward and, better still, much lower.