Keep those costs down

Cost really matters in investment. For one thing, charges are a known quantity within investors’ control. While we all worry about future investment performance, it’s not something we can have any certainty about; by contrast, you know the charges of a fund before you buy, and you can decide whether they are acceptable. 

More fundamentally, investors routinely underestimate the impact of fees. If two funds hold identical portfolios, a 1 percentage point difference in their annual cost will lead to a 14 percentage point difference in total returns over 10 years.

For these reasons, charges are an important part of the debate when you’re weighing up the merits of several different investment products. Clearly, they’re not the only factor to consider, but keeping your cost of investment down should be a priority.

Now, for many years, investment companies could routinely argue that they were cheaper than other types of collective investment fund. They have never paid commissions to advisers recommending them to clients; most other funds had to build the cost of these payments into their charges.

A decade ago, however, regulatory reforms levelled the playing field, outlawing commission payments of any kind. That has led to charges coming down across the board, and many open-ended funds now at least match their investment company counterparts on cost. Investment company boards have responded by negotiating fees even lower – there are typically dozens of investment trust fee reductions announced every year. That said, it’s hard to generalise about whether trusts or funds are cheaper overall: you need to do your homework.

Still, there is one area where investment companies maintain a clear competitive advantage – and it’s something investors should think about as they consider how to make good use of tax efficient investment allowances in the run up to the end of the tax year on 5 April. For individual savings account (ISA) and pension investors, opting for investment companies can unlock lower fees on the online investment platforms through which most people save these days.
 

That’s because to buy into an investment company, you buy its shares, which are listed on a stock exchange like those of other publicly quoted companies. The cost of buying, selling and even holding shares on many platforms is less than you pay if you’re trading in an investment product, such as an open-ended fund.

Take the biggest platforms, including AJ Bell, Hargreaves Lansdown, interactive investor and Fidelity. If you hold £100,000 or more worth of investment trusts in an ISA on one of these platforms, you’ll pay less than £150 in charges over the course of a year. And that includes the cost of making one trade per quarter.

The other point to make here is that sticking to investment companies will give you more choice about the platform you use – and thus the opportunity to shop around for an even better deal on charges. Platforms such as Trading 212 and Freetrade, for example, are targeting investors trading directly on the stock market, rather than through funds. You can use them to buy shares in investment companies, but you won’t normally be able to buy other funds.

There are lots of nuances to consider with investment platform charges. For example, some charge fixed cash fees, which work out cheaper on large portfolios, while others levy a percentage of the value of your portfolio. Some weight their charges towards dealing fees rather than annual charges, which will suit investors with a buy and hold mentality. The AIC offers comparison tables to help investors sifting through the options.

Overall, however, investment companies are very often a lower cost option for platform investors, including in ISA and pension accounts. And over time, those savings can make an enormous difference to returns. You don’t know yet how any fund will perform, but there are ways to maximise the potential of future investment returns.