Was this the Alan Miller who had served many years at the right hand of Jupiter and New Star founder, John Duffield? The two went separate ways in 2006 but over the previous dozen years, fat fund fees had made Alan Miller a wealthy man (memorably financing the groundbreaking divorce of the first Mrs Miller). However, the True and Fair launch was so brash, so look-at-me, that there seemed precious little room for it not to be authentic. Moreover, the crusade is not explicitly against 'fat fund fees'. Rather, it is against opaque reporting of fees.
This ground has been gone over in this column many times. Nevertheless, a summary would be useful. Fund costs of course go further than the 1 to 2 per cent annual management charge for the typical actively managed fund, which is the number most investors are familiar with. There are audit fees, custodian fees, and registrars' fees which typically add up to another 0.3 per cent. The fund manager's fee and these overheads are added together to arrive at the 'total expense ratio', which has emerged as a standard piece of data in recent years and should be readily available to anybody with the nous to look for it. For instance, on the Fidelity Funds supermarket, the total expense ratio is given for every fund, right alongside the annual management charge.
Most investors are also on top of the initial charge, which is levied when you buy into the fund. This was traditionally 5 per cent but if you pay that sort of figure these days, you are a hopeless case. You can't easily just add the initial charge to the total expense ratio, because it is a one-off charge and the other, a recurring charge.
But there's a further category – the transaction costs incurred on a daily basis as the fund manager sells this holding and replaces it with another. These are commissions, spread and stamp duty. A very active fund manager might run up quite considerable transaction costs. Although declared in the fund's annual report, transaction costs are excluded from all the standard measures. The Millers dub these "hidden costs".
The Investment Management Association's chief executive, Richard Saunders, gamefully squared up to them. "Hidden costs? What nonsense!" he said, on air and on his blog. Let's have a look at that. Richard Saunders says transaction costs do not need to be reported in detail because their effect is inescapable. If one fund has high transaction costs and another has low transaction costs, the effects will be rolled up with the gains or losses from the transactions, and apparent in the performance figures. Ideally, high transaction costs will deliver a higher return… all that effort will not be wasted. But if it is wasted, there will be no getting away from it.
To support this view, Mr Saunders advised that over a 10-year period, the average active UK-focused fund overcame both high total expenses – typically twice as high as tracker funds – and high transaction costs – five times higher than trackers – and delivered 4.04 per cent a year, compared with only 3.87 per cent a year for comparable tracker funds.
His reaffirmation that the huge extra expenses deliver such a tiny advantage could be a whole debate by itself. But the moot point in this context is that Mr Saunders cites only the average fund. Whereas tracker funds are all clustered closely around their average, there is of course huge dispersion in the results of active funds. Half the active funds achieve less than 4.04 per cent a year and very few indeed stay above the average consistently. The transaction costs incurred by these funds are very material to investors and in the interests of transparency should be factored into the standard statistics calculated by the industry on a daily basis.
The Millers cite many scandals on the periphery of the industry which would have been harder to perpetrate if their True and Fair manifesto had been obligatory. Their research report at trueandfaircampaign.com makes good reading. I recommend it to you.
