02 Aug 2010
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James Budden
Total Expense Ratios
Recent research released from those excellent folk at the AIC carries the headline “almost a third of investment companies have charges less than 1% per year”. What really jumps out of this announcement is that, by deduction, this means over two thirds of investment trusts now have charges of more than 1% per annum. Indeed the average conventional investment company total expense ratio (TER) is now 1.76% up from 1.41% in 2008.
The growth in specialist trusts investing in property and hedge funds is cited as a reason for this increase. This seems fair enough as both those asset classes may include layers of charging in their overall TERs. However, for a sector that in the past has made a virtue out of parsimony and railed at the perceived overcharging of unit trusts, this level of pricing does not sit comfortably. Back in the old days, unit trusts charged 5% initially and 1.5% on an annual basis and shared the proceeds with the independent financial adviser. In contrast, investment trusts did not provide commission so appeared to offer significantly more value to the investor, especially when the fee difference was compounded over the years. Nowadays, distribution patterns have altered so that the initial charge is hardly ever paid or, if it is, it is rebated back to the client. The annual management fee of 1.5% now looks quite skinny against our new investment trust average.
Furthermore things may get worse for investment trusts. The Retail Distribution Review (RDR) seeks to remove any element of commission bias from the decision process when purchasing investment funds. This should level the playing field for unit and investment trusts, allowing choices to be made purely on merit. However it could also lead to an unbundling of unit trust pricing, leaving an annual charge at the factory gate of around 0.75% - less than half of the average TER for investment trusts. On the bright side, there are still some great bargains to be had in TER terms in the investment trust sector. City of London has a TER of just 0.43%(1), Bankers is 0.52%(2) and our own stalwarts Scottish Mortgage and Monks weigh in at 0.52%(3) and 0.62%(4) respectively. Indeed, at this level investors can access active equity management at index pricing levels which is a powerful alchemy and one that does give credence to the low cost label.
For more information about TERs, read our Strength in Numbers article.
Please remember that ongoing stock market conditions and currency exchange rates will affect the value of investments and any income from them. Investors may not get back the amount invested.
1 City of London TER is as at 30/06/2009 (Source: AIC)
2 Bankers TER is as at 31/10/2009 (Source: AIC)
3 Scottish Mortgage TER is as at 31/03/2010 (Source: Scottish Mortgage Annual Report and Financial Statements March 2010)
4 Monks TER is as at 30/04/2010 (Source: Monks Annual Report and Financial Statements April 2010)