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High-charge funds fail to perform

Over half of all funds with annual management charges of 1.75 per cent or more have underperformed in the past three years.

Research by Money Marketing, in conjunction with Financial Express, found that 40 out of 65 funds run on charges of 1.75 per cent or higher have failed to beat their benchmark and 26 have recorded bottom-quartile returns in that time.

Fund firms have often labelled the extra layer of cost as a requirement to drive outperformance. If a fund of £500m were to have an annual charge of 1.75 per cent rather than the industry norm of 1.5 per cent placed on it, management is effectively taking an extra £1.25m out of the fund as a fee.

Hargreaves Lansdown investment manager Ben Yearsley says: “An argument can be put forward for one-year performance as the difference between top and bottom quartile can be minimal but over three years that is unlikely to be the case. This is where the argument is raised of money being paid back as funds have to justify the fee.”

Notable funds on the list include the £1.4bn Aberdeen Asia Pacific and £608m Fidelity Moneybuilder global, with both being third quartile over three years in their sectors.

Yearsley holds a number of investments with Dalton Strategic Partnership and he points to the firm as an example as three of its funds – Japan, European and Asia opportunities – have all underperformed over three years despite having an annual charge of 2.15 per cent.

Dalton partner Richard Jones says: “We expect all of our funds to outperform in the medium to long term but that is not always the case with active vehicles that operate an unconstrained approach but when they go right they tend to fly.

“With regard to the fee, we charge the excess as we limit the amount that goes into the funds as we would rather run them on an unconstrained approach than have six times the amount of assets in the funds.”


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