The Loch Ness Monster of investments? Trade body says there is no evidence of hidden fund fees

 
William Turvill
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Loch Ness Monster
The Investment Association, trade body for investment managers, today condemned “hidden-fees hysteria” (Source: Getty)

The investment managers’ trade body has published a report questioning the existence of hidden fees lurking in funds.

The Investment Association today condemned “hidden-fees hysteria”.

The IA research, carried out by Fitz Partners and published today, found that equity fund returns are 0.71 per cent above index returns each year, looking at data from between 2012 and 2015.

The body said the hidden-fee claims are taken “seriously” by the industry, with the IA planning to launch a new Disclosure Code, which will aim to standardise the way fees, charges and implicit costs are reported.

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But the research found “zero evidence that funds’ returns are affected by hidden fees lurking within, suggesting that ‘hidden fund fees’ may in reality be the ‘Loch Ness Monster of investments'”.

The research claimed that fund performance in recent years proved that costs are not hitting returns for investors.

Response: 'Not worth the paper it is printed on'

Gina Miller, of the True and Fair Campaign, condemned the report as “amateurish and totally misleading”.

“Of course over the long-term the returns from investment after costs must equal the market returns less all the costs (including transaction costs),” she said.

Selecting arbitrary time periods or funds, does not change this basic fact. Instead, the IA has taken a short time period, of just three years and a convenient time for analysis in which many active funds fared well due to their inherent small/mid cap size bias. They have also ignored completely the spread element of transaction costs and survivorship bias.

“This report is not worth the paper it is printed on. The fact that the FCA has deferred their responsibility in terms of cost transparency to the conflicted amateurs at the IA is utterly shameful and should be halted immediately.

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Laith Khalaf, a senior analyst at Hargreaves Lansdown, commented that the “debate over charges has undoubtedly been characterised by exaggerated and sometimes baseless claims”.

But he added:

At its root there is an issue over the disclosure of charges which the funds industry needs to get to grips with.

The problem lies in the transactional charges incurred by funds which appear in the annual reports and accounts, but don’t appear in the Ongoing Charges Figure disclosed by funds on their factsheets.

There is a genuine question over the correct presentation of these charges, because they are variable, and so an annual calculation may give a misleading impression of the regular costs to investors. Events like manager changes and extreme fund flows can create spikes in turnover and transaction costs, despite being non-recurring by nature.