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TERs for fears

I remember standing on my Watney’s beer crate at Portman Road in 1979 watching Trevor Francis make his Nottingham Forest debut against my beloved Ipswich Town. It was a notable occasion as it marked the appearance of Britain’s firstever £1m footballer.

“What a waste of money,” bellowed from the stands every time he touched the ball. He didn’t score that day (although we lost 1-0) but it turned out he was not a waste of money after all, as his winning goal n the 1979 European Cup Final testified.

But for every Trevor Francis there has been a Robinho or even a Finidi George. Such highly paid players have, justifiably, been jeered by disgruntled fans for failing to turn on the style.

I am sure that just as football fans do not mind paying a star striker who scores goals for fun, investors probably will not mind paying a little extra for decent performance from their fund manager.

Sadly, many funds that charge the highest fees are also among the worst performers.

The subject of fees is an emotive subject and it is in the spotlight again – not surprising given the investment climate.

When shares are soaring, little attention is paid to the amount in fees that investment companies receive. But when fund values are falling, the costs paid by investors account for a greater proportion of their total returns – and it gets noticed.

Understandably, companies need to levy charges to cover their costs and return a profit. Even something as simple as sending out a statement costs money, particularly when there are tens of thousands of investors on the books. Then there is the cost of paying servicing costs to intermediaries.

But the annual management charge is just the beginning and even the total expense ratio still does not include all costs.

As Clive Waller at CWC Research says: “The AMC is a useless figure, the TER is misleading because it is not total – it does not include dealing charges or, if it is a fund of funds, the charges on the underlying funds. If the buyer knows exactly what the true cost is, he can compare fund manager performance against charges and make an informed decision.”

However, until full transparency is introduced, the TER will have to do – and at least it gives you some idea of the actual charge you pay.
Fund managers that levy high TERs justify the amount with the argument that it is results that count. They have a point – it will not bother you or your client one jot if you are paying a higher TER for consistent outperformance.

However, the vast majority of funds fail investors with their performance year in year out.

One group of funds that have been outed for offering poor value is multi-manager funds. I recall when all and sundry jumped on the multi-manager bandwagon started in the late 1990s. One provider spun the “Stella Artois” line in that multi-managers are “reassuringly expensive” because the funds are run by experts. Much like the ad, the catchline is outdated and extremely misleading.

I criticised Skandia best ideas last month but the likes of Henderson, Gartmore are among those firms that have funds that struggle to deliver aboveaverage returns, yet levy higher than average TERs for their sector.

The most shocking performance, though, comes from Insight – four of its five multi-manager funds have delivered fourth-quartile performance over the past one, three and five years, according to Morningstar. The remaining fund has delivered fourth quartile over one and three years and third-quar-tile numbers over five years. Such dismal performances certainly deserve a chorus of “what a waste of money”.

Paul Farrow is personal finance editor at the Telegraph Media Group


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There are 9 comments at the moment, we would love to hear your opinion too.

  1. Henderson named as not achieving above average returns on a multi manager fund???
    As per Trustnet, Multi Manager income & growth has achieved a 5 year cumulative return of 36.4% compared with a Cautious Managed Sector Average of 13.7%??
    Would you care to elaborate on which funds you refer to Mr Farrow?

  2. There are parallels here, of course. The FSA has a huge TER and awards itself performance fees even when it manifestly fails to deliver any of the things set out in the Statutory Code of Practice For Regulators. And, worse still, it seems to be above the law and beyond being held to account.

    Would you invest in any FSA-run investment fund? Not bloody likely. They’re all just in it for the money.

  3. Fund of Funds have to include the weighted TERs of their underlying investments in their own TER if they invest more than 10% of their assets in other funds. This is called a Synthetic TER and is compulsory under COLL 4 Annex 1Total expense ratio calculation 6. If you believe that Fund of Funds are not doing this then the perhaps the focus should be more on this point? In regards to dealing charges these do not have to be included under the rules.

  4. Julian, why not comment on TERs, unless of course your only specialist subject is slagging off the FSA?! 🙁

  5. As Brian Clough said after Francis had scored the header to win the cup – ‘The cross deserved the goal & John Robertson cost nowt!’

  6. Got it in one Paul. Doesn’t matter what the subject you can expect to see Julians boring, bitter rant about the monsters ‘in their Ivory Towers’, or sometimes he’ll branch out with a ‘…but what about the banks, the banks, the BANKS!!!’.
    Usually the first comment too. Not sure if he actually does any work.

  7. Paul and yawn – you are right about Julian…but give him some credit, at least this time!

    At least he is brave enough to state the obvious and this one I found particularly humorous!

  8. Don’t want to stick the boot in Julian but they’re right; time for some constructive comment and I know you can do it!

  9. Crazy gang IFA member 17th August 2010 at 10:29 am

    Re anon 16th August – ‘COLL 4 Annex 1Total expense ratio calculation 6’

    Wow I wish I could just quote that off the cuff, very impressed!!

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