Charging ahead

Investment companies continue to cut their charges. No fewer than 19 closed-ended funds have already revamped their pricing this year, reducing fees and restructuring their charging structures to deliver better value.

The ongoing drive to lower costs partly reflects the pressure that actively-managed funds of all types now feel from the passive management sector, where ultra-low-cost index trackers are taking an ever-greater share of the market. But the investment company industry is also responding to the trend in the open-ended sector towards lower costs in recent years.

There was a time, of course, when advisers and investors could routinely assume that investment companies had lower charges than their open-ended fund counterparts. In the days before the retail distribution review of 2012, the cost of commission payments paid by the latter made it difficult for them to compete on price. After RDR outlawed commissions, open-ended funds were able to bring charges down – and large numbers have done so.

The consequence, some five years later, is that investment companies are having to work harder to deliver competitive fees; and large numbers are doing exactly that.

As a recent report in Money Observer explains, the sector is bearing down in charges in two different ways. Not only are we seeing outright price cuts, but also, many trusts are changing their fee structures so that charges come down as assets under management increase. The economies of scale these larger trusts benefit from are shared with investors.

Templeton Emerging Markets provides a good example of both trends. Until recently, the fund charged a flat fee of 1.1 per cent a year. Now it has cut the headline fee to 1 per cent, but it has also introduced a tiered structure: on net assets above £2bn, the charge will reduce to 0.85 per cent.

The largest investment companies are able to offer very good value with these structures, with many now featuring charges for active management that come close to index tracking prices. Scottish Mortgage, for example, charges 0.3 per cent on the first £4bn of assets under management, with the fee coming down to 0.25 per cent thereafter.

Tiering represents a competitive advantage with which the investment company sector can make hay, since open-ended funds have not typically moved to charging in this way, despite the very large size of some vehicles. Indeed, in the context of the Financial Conduct Authority’s recent investigation into the asset management sector (which largely excluded investment companies), which accused fund managers of earning excessive profit margins, it seems almost perverse to argue that investors should not share some of the economies of scale that size delivers.

In the end, of course, charging is only one element of the equation that determines long-term investor returns. Nevertheless, fees do represent tangible evidence of a manager’s commitment to the best interests of investors – and in many cases, rival closed-ended and open-ended funds run by the same management team and invested in almost identical pools of assets are still charging quite different prices.

Charges are certainly not the be-all and end-all of fund selection, but price competition is good news for investors. It’s encouraging to see investment companies once again taking the fight to rival fund structures on charges.