Merryn's Blog

Nice fund, shame about the price

This small fund has an awful lot going for it. Unfortunately, it’s far too expensive.

Regular readers will know that I am always on the lookout for good funds. I don't think that there are many managers that are capable of regular outperformance, but I live in constant hope that over time a few may live up to their promises.

As far as I can see, there are a few characteristics that would give a fund the best of chances: it needs to be small; it needs to have a clear strategy; it has to be run by someone clever who has the focus and boredom threshold to enable them to stick to that strategy (constancy is really boring); it must have a value or a momentum bias; and it needs to be cheap.

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I have recently come across one that fits in many of these ways: the TB OAM UK Equity Market Fund. It is tiny (under £3m) and only a year old, but run by David Urch, a manager with a good long-term record and a strategy that is mostly momentum (he calls it "harnessing positive change" but it's the same thing), but refers to valuations too.

But much as I like it, there is an enormous problem with it: the fee. There is a management fee of 1.75% (so the total expense ratio , or TER, is even higher). The firm says it is planning to cut it soon (that's something to watch for). But right now it is nuts. It means that the fund has to outperform the market by 2%-odd every year just for you to break even. Very few funds have a record of being able to do that it's a big risk for an investor to take.

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That's particularly the case when passive funds are just getting cheaper and cheaper only today ETF management firm Lyxor announced that it is cutting the TER on its FTSE100 ETF and its S&P500 ETF to a mere 0.15%.

These days active management fees of anything over 0.75% are beginning to look way too high to me (I'd still like firms to find a way of charging a flat fee, not one on the amount invested, but I'll come back to this another day). And 1.75% is just unacceptable.

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