Fund management has always held that its unique selling point is transparency. The information provided to customers is gold standard, specified in detailed regulations drawn up after extensive consumer testing around Europe. So, when the accusation is made that the industry is not being transparent, whether or not with a foundation in fact, it needs to be taken seriously.
IMA is today releasing proposed guidance to members around the enhanced disclosure of fund charges and costs. It builds on the EU rules, for example by:
-advising on best practice, such as always using the more comprehensive “ongoing charges” figure, which is about to replace the total expense ratio, rather than just the annual management charge to describe recurring costs
-giving fuller explanations of the nature of different charges
-pulling in information about costs of trading the underlying portfolio, which is currently available only in the detailed legal and accounting documentation for funds.
What the guidance does not do is to try and construct a single figure that encompasses both the fund charges and the costs of trading the underlying portfolio. There are several reasons for this, and regular readers of these pages will be familiar with them.
First, trading costs cannot meaningfully be separated from the impact on investment returns of the associated trading. Lower trading costs can only be achieved by reducing trading, and that may result in lower returns, not higher ones. Adding trading costs to the TER would be like trying to mix oil and water.
Second, unlike the ongoing charges figure or TER, trading costs do not impact all investors equally. The daily pricing of funds takes account of processes (known in the jargon as “anti-dilution” policies) which ensure that if flows in or out of a fund give rise to the need to buy or sell assets, the associated costs fall to those investors entering or exiting rather than those who stay invested.
And third, the cost of investing is the difference between the return actually received by the investor and the theoretical return that would have been achieved had he miraculously been able to invest cost-free. IMA research has demonstrated that the TER is in fact the best measure of this.
Adding trading costs to the ongoing charges figure or TER would be positively misleading for investors. It would give them a false number that overstates the cost.
But that is not to say investors do not have a right to know these costs. And that is the thinking behind our new guidance. Several large firms have indicated to us that they plan to use it. We will be encouraging all our members to do so.
Richard Saunders is chief executive of the Investment Management Association