The Association of Investment Companies (AIC) will replace Total Expense Ratios (TERs) on investment trusts with an "Ongoing Charges" figure from the end of May. The change, critics say, will only create further confusion for investors without improving transparency on fees.
The ongoing charges figure does not include entry or exit fees, performance fees or the costs of trading the underlying portfolio.
The AIC initiated the change after its members raised concerns about inconsistencies and confusion created by the wide range of TER data available online, which is based on variety of different methodologies. The new methodology also takes into account European regulatory developments which will affect the way in which expense ratios are calculated across the wider funds market and require these figures to be published in a key investor information document (Kiid).
The table below shows the most common expense incurred by investment companies and whether the AIC recommends it be included or excluded in the calculation of the ongoing charges figure. The figure will not include the cost of trading as the AIC defines ongoing charges as "the costs that the investment company would have to pay in the absence of any purchase or sales of investments and if market remained static through the period. Ongoing charges are different to total expenses as not all expenses are considered to be operational and recurring."
What will be included in 'ongoing charges'?
| Expense items | Inclusion in 'Ongoing charges'? |
| Management fee | Include |
| Performance fee | Exclude |
| Directors' fees and expenses | Include |
| Audit and tax compliance fees | Include |
| Custody/depositary | Include |
| Fund administration | Include |
| Fund accounting | Include |
| Company secretarial | Include |
| Registrar | Include |
| Marketing | Include |
| Insurance | Include |
| Registration fees, regulatory fees and similar charges | Include |
| Interest costs and associated drawdown costs | Exclude |
| Irrecoverable VAT | Include |
| Tax charge | Exclude |
| Realised and unrealised capital gains/losses | Exclude |
| Currency profit/loss on revenue bank account | Exclude |
| Costs associated with portfolio transaction (eg. Brokerage or custodian costs) | Exclude |
| Soft commission and other similar arrangements | Exclude |
| Trail commission | Exclude |
| Restructing costs | Exclude |
| Share buy-backs/issue costs | Exclude |
| Dividends | Exclude |
Source: AIC
The ongoing charges figure will also exclude performance fees as this mirrors the approach taken by Ucits funds and is consistent with European regulations. However, to address concerns that the exclusion of performance fees could be perceived as understating the total costs of fund management, the AIC is recommending that, in addition to disclosing the principal ongoing charges figure, AIC member investment companies should also disclose details of the performance fee arrangements and a separate percentage figure for the performance fee and a total showing the ongoing charges calculation plus the performance fee.
Whether the AIC's decision will help to reduce inconsistencies and aid comparability for investors between open-ended and closed-ended funds, remains open to question. "I think it is all rather confusing. One moment we are getting close to a total cost of ownership and then it says the new method will make it easier to compare with Oeics, who as yet don't do this. Performance fees are kind of in and then out?," says Mark Dampier of Hargreaves Lansdown.
Gavin Hayes, managing director of discretionary investment manager Whitechurch Securities, says he welcomes the change the AIC is making as it will bring investment trusts more in line with open ended funds to provide greater ease of comparison for investors. "Perhaps the one drawback is that ongoing fees do not take into account the effect of performance fees on the overall cost. While the AIC are recommending members disclose the effect of performance fees, it will be interesting to see the extent to which this transpires," he adds.
Others maintain that to be truly transparent, funds need to include dealing costs (these are disclosed but in documents most investors rarely, if ever, see) in the figure.
"In our view the 'ongoing charges' is a complete fiddle as it excludes performance fees, dealing costs, platform fees, distributor costs and much else," says Gina Miller, founding partner, of SCM Private. She adds that the UK retail investment management industry needs to move from "rhetoric to action" and to offer consumers 100 per cent transparency of investment costs and fees by enabling a system that calculates all costs and fees in one easy to understand measure.
Ian Sayers, Director General, Association of Investment Companies (AIC) said: "We are aware of growing calls for a total cost of ownership figure to be published which would include Ongoing Charges, but also the costs of advice, platforms and internal dealing costs. We believe the investment company sector has much to gain from supporting greater transparency in fund costs. The publication of the AIC's methodology for Ongoing Charges is a key element in delivering this ultimate goal. While it may take some time before a consensus is reached across the financial services sector on how the other elements would be incorporated, this is an important step forward."
