Management Fees: judging the price of funds

13th August 2010

The current debate on the price of funds tends to polarise crudely into ‘cheap is good' versus ‘expensive is bad'. If this were the case, ETFs – usually the cheapest option to access equities – would be the only viable solution. But most retail investors see a place for active funds in their portfolios. Is there a better way for investors to judge the relative price of funds?

These articles outline some of the prevailing views on fees. In this piece, Paul Farrow argues that many funds offer poor value for money.  This piece in the Times argues that investors should be wary of the new vogue for performance fees.

There is an underlying message that fund managers are somehow being ‘sneaky' about fees. In fact, high fees and low performance are circular. Most investors examine fund performance net of fees. If a fund is high charging and not offering commensurate performance, it will perform badly relative to its peer group. Performance is still the strongest driver of fund sales, so high charging is – to a large extent – self-defeating.

Equally, while it is tempting to just blame greedy fund managers, there are other mouths that get fed along the value chain. In this thread  IFA DunstonH gives a full and coherent explanation of fund charging: "(A fund may) have a 1.5% annual management charge. 0.5% of that goes to the servicing IFA. Around 0.3% goes to the platform/product provider and 0.7% to the fund house. There are some funds that don't pay a commission like that but they are (usually) included as a loss leader."

It also leaves out the fact that certain asset classes are more expensive to buy than others. It is more expensive to trade emerging market equities, for example, or smaller companies. This doesn't mean investors shouldn't have exposure to those asset classes. Investors should be paying less for the majority of bond funds because the potential returns are lower.

Nevertheless, as with every purchase from a tin of beans to a house, it is necessary to be careful on price. Institutional investors have long been more conscious of price than retail investors, as this story shows.

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