I have the boredom threshold of a small gnat and am biologically indisposed to wading through pages of small print trying to ascertain exactly what investment providers plan on charging me.
Unfortunately I seem to have spent over 20 years doing just that. I know every trick in the book and can decipher share classes, OCFs, TERs, AMCs, transaction fees, exit fees, custody fees – you name it, I’ve seen it. I am the pathologist of fund charges.
Sadly the older I get the grumpier I get and the more I resent having to wade through endless pages of small print and associated BS jargon to do this.
So on 2nd January last year I hatched a cunning plan. I would put £500 into over 22 investment accounts, all invested in broadly the same way (portfolios with about 60% shares in them) , and see what was left in the pot after a year. The end number was all I cared about and I could burn the Ts and Cs because there, down to the last penny, would be the £ embodiment of performance after all charges. We checked back in on 4th January this year. What was left in the pot?
Not so fast. 12 months is not enough time. To be honest my 10 week old puppy could pick top performing stocks over one year – it’s not enough time to judge skill over luck.
BUT it does give us an early indicator of how fees eat into returns. And how all these groups managing what we loosely refer to as ‘mid-risk portfolios’ are actually managing things which are tweaked and fine-tuned and start to look quite different over time. Some groups made good calls over 2018 (ie “shares are looking a bit dicey let’s hold less of them” – tweak fiddle reduce). And others got it wrong. This short-term fiddling is called “tactical asset allocation”. Compared to the big fat long-term view which is “strategic asset allocation”.
All those in the bottom half either charged relatively high fees or made some dicey tactical asset allocation calls. (Beefing up the share slice of the pie in a year when shares suffered). If you want to see more, you can see the fuller details here.
Some investment outfits charge a fixed £ fee instead of a %. Alliance Trust, Interactive Investor and The Share Centre. Others - Fidelity and Barclays - have minimum £ amounts. So these guys look unfairly bad when you think about fees in the context of a small £500 test account. (In an ideal world these test accounts would have been bigger but I am not an heiress and I already lost the cost of a new Mulberry handbag on this jolly exercise so bear with!)
There are lots of different charges, described in lots of different ways. And some are pretty much impossible to find. Which is why we embarked on this exercise. It means we don’t actually need to decipher the goings on and the small print behind the scenes. The point I make is that performance to retail investors is simply what’s left in the account after charges have been deducted.
European regulation (called MiFID II which I always think sounds like a kids’ TV show but is sadly less fun) is tightening up rules here. From April this year, investment groups will need to show us a personalised rear-view mirror of performance after fees. So not just an example of what we will pay in the future. But what we actually paid in the past and performance after that. I really hope that the industry adopts common methodologies so it’s easy for us to compare like with like. But I’m not holding my breath. I think I’ll need to keep holding those accounts for another few years yet.
As a footnote I will say that it’s not all doom and gloom. My losses after charges across 22 players work out as 8.9%. The FTSE 100 was down about 12.75% over the same period. So the diversification of these portfolios is doing its job.
Have a great weekend.
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