There has been much debate over the years around the subject of portfolio turnover rate, which represents the hidden charges levied by funds not disclosed by the ongoing charges figure.
When key information documents were introduced in July 2011, the requirement to disclose the PTR was abolished. Many people at the time saw this as a retrograde step. In the interests of investors, surely it makes sense to make full disclosure of costs?
The FCA has introduced the OCF to replace the total expense ratio but done nothing in respect of the PTR. One of the issues has been the way in which it has been calculated previously, with the formula having the effect of doubling the charge.
However, this can be overcome by taking the lower of the shares bought or sold figure and dividing that amount by the average fund size during the year.
The PTR calculates the amount by which a portfolio is turned over or changed during a year. Some might call it churning. So, if 100 per cent of the shares are sold and replaced, the PTR is 100 per cent. Such a rate of turnover will incur higher dealing fees, more bid offer spreads and greater taxation costs than a fund with a lower PTR.
It stands to reason, then, that a tracker fund representing an index, such as the Vanguard S&P 500, has a PTR of just three basis points.
There are many studies on passive investing by way of low-cost index tracker funds and exchange-traded funds that show they outperform active strategies most of the time.
So this is a secret that active fund managers do not want the public to know about. However, it is all starting to change.
Hitting home with consumers
Investors need to be openly informed of the full impact of charges on their portfolios. The FCA has a duty to enforce full disclosure of the PTR on fund managers – if for no other reason than it is quite simply the right thing to do.
You cannot help but wonder why it has not enforced full disclosure in the UK when it is compulsory in the US. Is it because the fund management industry here is so rich and powerful it carries far too much lobbying power and influence on the regulator?
And why change the term TER to OCF? The cynic in me thinks maintaining the former would imply full charges, including PTR. The latter term is a totally watered down description, obviating it.
“You cannot help but wonder why it has not enforced full disclosure in the UK when it is compulsory in the US.”
SCM Direct has calculated the average PTR in the UK is 38bps. This means the average OCF of 85bps is understated by 45 per cent. That is a significant under-reporting of the TER, to use an old term. This is a scandal that needs to be addressed by the FCA – and the time is now.
Tony Byrne is financial planning director at Wealth And Tax Management and author of Wealth Magic