The Investment Management Association has proposed a new system to highlight the impact of costs on the performance of an investment fund.
The new system would call on fund managers to calculate the number of units in issue on a daily basis over the year and divide that by the total costs.
The trade body says this would offer a simple breakdown of costs and performance for investors.
IMA chief executive Daniel Godfrey says: “The fact is that for any fund’s accounting year, we know exactly how a unit has performed and we also know every penny that has been spent by the fund (or allocated to a share class).
“This could be annual management charges, administration expenses, audit fees, performance fees, dealing commissions, stamp duty, foreign exchange dealing costs or anything else – it has all been spent and it has all been recorded.The proposition is if we calculate the average number of units in issue on a daily basis over the year and divide that into the total costs, we will we get a reasonably robust approximation of the costs incurred by a unit held over the full accounting year.”
The trade body uses the example of an investor holding 3,456 units on 1 January 2012 with a value of £4,320, giving a price of £1.25 a unit. After a year of adding to their position in the fund, the investor has 5,140 units at a value of £6,939 at 31 December 2012, meaning each unit is now worth £1.35.
It says: “For a unit held throughout the whole year, the price went from £1.25 to £1.35, a rise of 8 per cent. The total costs for a unit held throughout the year were approximately 2.5p per unit. The costs were equivalent to a quarter, or 25 per cent, of the growth in the value of a unit.”
Godfrey says: “This is a simple proposition that has been missed as many people have been tangled up in knots trying to over-complicate the issue by finding some sort of ultimate solution.
“There will be issues and there will be criticism, such as the fact the method does not cover initial or exit costs. But if and when we hit these bumps, we should seek to find adjustment factors that we can all agree on rather than saying ‘it cannot be done’ and giving up.”
The asset management industry has been divided on costs since the launch of a new campaign by former New Star chief investment officer Alan Miller. The True & Fair Campaign launched in February 2012 to huge media interest, calling for 100 per cent transparency on where money is invested and the “full underlying cost of investments”.
The campaign, backed by Miller’s wealth management firm SCM Private, claimed dealing costs, “one of the largest hidden elements”, of £18.5bn would be paid for the whole of the UK savings and investment industry.