Dealing costs do not drag down performance, says IMA
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Hidden costs are not dragging the performance of actively managed funds below the published costs for trackers, argues research by the Investment Management Association.
The IMA says its research into management costs and performance within the largest fund sector, UK All Companies, uncovered no evidence that undisclosed costs are a significant drag on performance for actively managed funds.
The cost of investing in tracker funds turned out to be lower than their total expense ratio (TER) over 10 years. If there were hidden costs, the IMA says the actual costs would be expected to work out higher.
When comparing net returns with the TER for active funds, over the past 10 years, after charges, the average actively managed UK all companies fund performed better than the FTSE All Share Index. The IMA says this means the impact of investment choices made by fund managers has more than offset the costs involved.
It says the actual cost of investing in the average UK tracker fund is broadly similar to the published TER and the impact of cost can be measured very directly for index tracking funds.
When the IMA compared the average FTSE all share tracker fund in the sector, it found that over the past 10 years, after charges, investors would have received 0.55 per cent a year below the return on the index. This compares with an average published TER of 0.82 per cent.
The top 10 per cent of actively managed funds in the UK All Companies sector delivered at least 64 per cent growth over five years. This overtakes the FTSE All Share Index over the same period by at least 2.5 per cent per year (28 per cent in total), even after charges.
The worst performing 10 per cent produced returns of zero or less over the same period. This is equivalent to underperformance of the FTSE All Share Index by 2.6 per cent a year, the IMA says. The average TER for actively managed funds is 1.75-2 per cent.
The IMA concludes that while investment costs have contributed to the balance of some 1 per cent of underperformance, much of this is likely because of investment selection.
Richard Saunders, the chief executive of the IMA, says the research shows that both active and passive managers have a good story to tell, and that there is no evidence that dealing costs drag down performance.
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Readers' comments (1)
Anthony Badaloo | 12 Sep 2011 3:22 pm
Interesting. So generally, managers ARE adding value, though not a great deal. With an average tenure of three years, I guess the performance 10 year performance cannot be easily attributed to individual managers.
Would be interesting to see 20 year figures. Warren Buffet says clients loose 40 to 60 percent of their investment pots over a lifetime, to charges.
Will the advent of technology, wraps and RDR continue to drive down costs, or will it create more confusion for consumers?
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