Whenever markets trade in a range or head south for a sustained period, you can bet that investment fund charges will come under scrutiny. With volatility high, indices on a knife edge and investors increasingly trepidatious, a glut of stories has duly appeared highlighting ‘opaque’ TERs, ‘hidden charges’, unloved performance fees and high AMCs.
As the Telegraph’s Paul Farrow noted in his recent Money Marketing column, the debate over charges is nothing if not emotive, with the hostile mood little improved by fund managers’ general disinclination to offer a robust defence. Cynics might suppose they know what informs groups’ reluctance to engage – and in some cases I’m sure they have a point – but does an unwillingness to put your head above the parapet necessarily establish your culpability? Rightly or wrongly, many groups consider it to be a zero-sum game.
This time around the general debate has encompassed performance fees which, it is fair to say, have never been warmly embraced by the UK retail market. News that most funds levy fees on a relative, rather than absolute return, basis is unlikely to quell the criticism. But are performance fees inherently bad? Is there anything underhand about charging fees on a relative basis? Unless a fund explicitly targets absolute returns, in which case a relative performance fee is manifestly inappropriate, there appears nothing innately unfair about charging an additional fee for outperforming an index – even if it has fallen – as long as the investor knows that such a fee could be levied.
If that argument applies to performance fees, it also, of course, extends to AMCs and TERs. It has been suggested that some fund groups do not, shall we say, strain every sinew to highlight charges that nestle at the upper end of the cost scale, and that practice is undoubtedly something the industry could improve. But, in general, if charges are genuine, reasonably reflect the services and costs associated with a particular investment approach and are – crucially – transparent, why shouldn’t a group charge what it likes? Funds do, after all, incur different levels of costs and there is no uniform approach to managing assets. Fidelity, one of the few fund managers involved in this debate, argues that charges are justified by the number of meetings analysts hold with companies and suppliers in order to give clients an investment edge. If its performance reflects this extra work and the costs it incurs, then it is difficult to see the problem. Most car buyers accept that a high performance Porsche will cost more than a moribund Mazda. If a fund manager demonstrates consistent outperformance, why should the same principle not apply?
Some will say, of course, that this argument misses the point; that the real issue is whether TERs are an adequate gauge of total cost. As TERs do not include trading as well as other costs, there is justification for saying they are not. But as some commentators have pointed out, the real issue isn’t necessarily trading costs per se, it is whether the activity of the manager offers value for money. And this is, partly, why investors employ advisers. If they cannot themselves determine whether managers are adding value relative to their charges, then they have to employ someone who can. Most people understand – as evidenced by the very small number of investors who buy funds direct – that investing in assets is a complex, risky enterprise.
Much of the criticism of active management charges emanates from the passive management end of the sector, which of course has its own battles to fight, particularly when – as now – funds are the mercy of choppy or falling markets. In these conditions, costs must seem like safer ground for comparison than performance. But as long as investors understand what they are paying and what they are getting for it, the debate over charges seems, as a fund manager might say, a little overdone.