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Fund fees: are you getting what you pay for?

Fund charges have come under scrutiny but analysis by Chelsea Financial Services suggests pricey funds can be worth paying for if they perform well.

 
Fund fees: are you getting what you pay for?
 

The City watchdog has rightly shone its spotlight on fund charges in the past year but analysis by Chelsea Financial Services suggests more expensive funds can be worth paying for if they deliver superior returns.

The investment broker looked at 238 funds in the Investment Association UK All Companies sector with a five-year track record and found their annual ongoing charges ranged from 0.06% to 2.91%.

It revealed that 95% of top-performing funds charged over 0.7% a year and four of the top 10 performers levied more than 1% a year. However, those four funds outperformed the cheapest funds by between 127% and 208% over a five-year period – on an investment of £10,000 that means an additional return of between £5,500 and £8,500 after charges.

There were three funds in the top quarter of performers with an ongoing charge of less than 0.7%, the best performing of which was Montanaro UK Income which ranked 22nd with five-year returns of 71.2% and has a fee of 0.35%.

The iShares Mid Cap UK Equity Index fund was the highest-performing index tracker with a total return of 57.6% and annual charges of just 0.17%.

Close behind was another tracker, HSBC FTSE 250 Index, which had returned 56.8% over five years at an annual cost of 0.18%.

Paying more for a fund does not ensure better returns, unfortunately: 34 of the 60 funds in the bottom quarter of the sector had ongoing charges of 1% or more, Chelsea found.

This includes the two most expensive funds in the sector, which both charge in excess of 2%.

The most expensive is TC Delmore Growth & Income, which charges an eye-watering 2.91% fee but has returned just 22% after charges over a five-year period. It ranked 223 out of 238 funds.

Candriam Equities , ranked 217, has returned 23.6% over the same period and charged investors 2.34% a year. The third most expensive at 2.17% was MI Brompton UK Recovery Trust , which has returned 56.7% over five years and charges 2.17%.

Darius McDermott, managing director of Chelsea Financial Services, said cheap funds weren’t automatically best but nevertheless investment groups had to show they added value.

‘A consistent way to show this value would be best, so that investors can easily assess the advantages and base their decisions on more than cost alone,’ he said.

He added that funds were starting to reduce costs, noting moves made by Baillie Gifford’s , which cut the fees on 20 funds last year to provide ‘value for money’.

‘More companies could, and should, pass on their economies of scale to investors, but at the same time, investors need to understand that returns after charges are far more important than the level of fees alone,’ said McDermott.

Top 10 performing funds and costs

Position UK All Companies funds Five-year total return after charges Ongoing charges
1 Old Mutual UK Dynamic Equity 122.3% 1.07%
2 CFP SDL UK Buffetology 121.6% 1.28%
3 MFM Bowland 120% 0.90%
4 Old Mutual Equity 114.1% 1.10%
5 Old Mutual UK Mid Cap 113.4% 0.85%
6 Slater Growth 102.8% 0.78%
7 Unicorn UK Growth 96.1% 0.89%
8 Slater Recovery 95.6% 0.84%
9 LF Miton UK Value Opportunities 93.9% 0.89%
10 Barclays UK Lower Cap 92.3% 1.32%

2 comments so far. Why not have your say?

Samual Saunders

May 09, 2018 at 18:51

Does this take account of ongoing charges being discounted, such as with Hargreaves Lansdown?

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S_M

May 10, 2018 at 11:36

Personally, I never have a problem paying 1% for top quartile fund managers who consistently outperform over 5 years plus. Sometimes on Citywire, there is a fixation with charges.

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