Everyone loves it when an insider spills the beans. And no one has dropped as many as Alan Miller, formerly of New Star Asset Management. He's slammed the fees levied by fund managers as "disgraceful", saying that investors are paying far more than they realise for funds, due to hidden costs such as dealing charges, stamp duty and interest on borrowing.
How much more? Well, the average turnover (the frequency with which a manager sells and buys stocks) on a typical UK unit trust is 57%, estimates Miller. This, says his wealth management firm Spencer-Churchill Miller, means the true cost of investing in an average UK All Companies unit trust comes to 2.8% a year, rather than the oft-quoted total expense ratio (TER) of 1.6%. This is a big deal. Say you invest £10,000 over ten years. Given an annual return of 7%, a fund charging 1.6% would grow to £16,761; but one charging 2.8% would turn into £14,862, a difference of £1,899.
"The industry does not want this to get out," says John Lang at financial planners Tower Hill Associates. He's been highlighting hidden charges for several years, and points to a study done for the Financial Services Authority in 2000 by economist Kevin James. It showed that hidden charges added around 1% to the average TER on a unit trust, but just 0.1%-0.2% to a tracker fund. "So if clients are investing by themselves in a tracker fund, they are probably 2% a year in the money, which is huge."
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Indeed, if you take your average fund of funds, you're looking at fees of 4% or more, says Jason Butler at Bloomsbury Financial Planners. "So you already have a bloody big mountain to climb" to make up the difference in returns. Given that most fund managers fail to beat the market at all consistently, let alone by 4% a year, there seems little point in the average investor betting on getting lucky.
So what can you do? The good news is that while unit trusts are as costly as ever, trackers are becoming cheaper. As we've noted before, the UK launch of Vanguard, the US index-tracking fund giant, has seen its rivals cut costs too. Lang also points to novel new trackers based on fundamental analysis, from Dimensional Fund Advisors.
One example is their value fund, which invests in companies with low price/book-value ratios. The minimum investment is high at £100,000, but you should be able to invest a smaller amount via a financial adviser.
Jody studied at the University of Limerick and she has been a senior writer for MoneyWeek for more than 15 years. Jody is experienced in interviewing, for example in her time she has dug into the lives of an ex-M15 agent and quirky business owners who have made millions. Jody’s other areas of expertise include advice on funds, stocks and house prices.
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