Research into the level of ‘hidden charges’ across the top 20 selling funds of 2016 has shown that investors in 13 funds, including Neil Woodford’s equity income fund, can be paying as much as 85% more in additional transaction fees than had previously been disclosed to them.
The research from consultancy firm Lang Cat shows that on average investors are paying 30% more, but the JP Morgan Global Macro Opportunities fund for example, has an extra 0.66% in transaction costs on top of the ongoing charges figure (OCF), a difference of 84.62%.
Under Mifid II regulations, investment managers are required to disclose additional transaction costs that are charged to their funds on top of the established OCF.
In response, JP Morgan Asset Management said it uses the 'full Priips methodology for calculating transaction costs' and stressed the ongoing charges for its Global Macro Opportunities fund are in the 'lowest quartile in its peer group'.
A spokesperson added: 'We support Mifid II's intent to make it easier for investors to compare fees.'
The £10 billion Woodford Equity Income fund has 0.28% of transaction costs in addition to the 0.75% of ongoing charges, a difference of 37.33%.
A spokesperson for Woodford Investment Management said that all costs in the fund, including transaction costs, have been disclosed on the firm's website since April 2016 and are updated monthly 'to help investors better understand the total, true cost of investing.'
The spokesperson added: 'Investment research costs have been paid by Woodford, rather than by the fund, since April 2016, with no increase to the existing annual management fee.'
According to the Woodford IM website, as at the end of December 2017 the total cost for investing in the Woodford Equity Income fund was 0.96%.
The figures provided by the Lang Cat are based on a five year average.
At the other end of the scale, the Lindsell Train Global Equity fund has only 0.01% of transaction costs with a difference in the actual cost of ownership of just 1.33%, while the Fundsmith Equity fund has a difference of 4.76%.
The additional charges on the funds are not new charges, but rather didn’t have to be declared pre-Mifid II.
Seven of the top 20 funds (see table below) in the Lang Cat research disclose their transaction costs as zero, but the consultancy said it is unclear yet whether these funds genuinely have no transaction costs or whether they are being met from company profits, rather than being borne by the fund.
|Fund||OCF||Transaction costs||Actual cost of ownership||% difference (between
OCF and new actual cost figure)
|Woodford Equity Inc||0.75%||0.28%||1.03%||37.33%|
|Invesco Perpetual Global Target Returns||0.88%||0.35%||1.23%||39.77%|
|Vanguard LS 60% Equity||0.22%||0.11%||0.33%||50.00%|
|Henderson UK Absolute Return||1.06%||0.79%||1.85%||74.53%|
|Lindsell Train UK Equity||0.72%||0.00%||0.72%||0.00%|
|JPM Global Macro Opps||0.78%||0.66%||1.44%||84.62%|
|Lindsell Train Global Equity||0.75%||0.01%||0.76%||1.33%|
|Old Mutual Global Equity Absolute Return||0.85%||0.40%||1.25%||47.06%|
|Vanguard LS 40% Equity||0.22%||0.12%||0.34%||54.55%|
|Old Mutual Cirillium Balanced||1.62%||0.00%||1.62%||0.00%|
|FP Balanced Portfolio Overlay||0.67%||0.00%||0.67%||0.00%|
|Fidelity Moneybuilder Income||0.56%||0.18%||0.74%||32.14%|
|Investec UK Alpha||0.83%||0.64%||1.47%||77.11%|
|Aviva Investors Multi-Strategy Target Income||0.85%||0.25%||1.10%||29.41%|
|Troy Trojan Income||1.02%||0.00%||1.02%||0.00%|
|Old Mutual Cirillium Moderate||1.66%||0.00%||1.66%||0.00%|
|L&G Global Inflation Linked Bond Index||0.27%||0.22%||0.49%||81.48%|
|Dimensional Global Short Dated Bond Fund||0.29%||0.00%||0.29%||0.00%|
Mike Barrett, consulting director at the Lang Cat, said investors have always been paying these fees and that most advisers have known there was more to fund costs than the OCF, but that now ‘speculation’ has been replaced with ‘formal disclosure’.
He said: ‘From an investor’s point of view, this is likely to be a real turn-off. Numerous surveys over recent years have shown how people trust financial services at roughly the levels normally reserved for politicians and estate agents.
‘[And] with fund groups now saying ‘Oh, sorry, when we said we were charging you x, we meant a figure over a third higher’, it’s not hard to understand why.
Barrett added: ‘This feeling of grubbiness intensifies when you remember just how hard the industry has kicked against being made to step up to the plate and disclose these charges.
‘This is not anything radical – all they are being asked to do is to tell people what it costs to invest with them.
‘It’s taken EU regulation to get this out in the open, rather than transparency being the default position.
‘Now we’ve come this far, we also need those firms who are disclosing a zero cost to explain the basis of their assumptions.’