The Investment Association (IA), the trade body for UK investment managers, has proposed a new, consistent calculation and presentation methodology for funds' portfolio turnover rates (PTR) in its Meaningful Disclosure of Costs and Charges paper.
PTR measures how much a manager has traded the underlying holdings within the fund they run. This is important in that the more a manager trades, the more internal costs a fund has, eating into its returns. This information is not available on fund fact sheets and is not included in Key Investor Information Documents (KIIDs).
The IA proposes that investors are told whether the PTR is high, medium or low for a fund relative to other similar funds, and how this relates to the transaction costs.
The IA has also created a framework for the disclosure of charges and transaction costs to allow for consistent disclosure across all investment products, including pension schemes. This includes calculating ongoing charges in a consistent way, with performance fees and one-off charges such as entry/contribution charges being expressed separately.
And the paper undertakes an extensive examination of all the explicit and implicit costs incurred when investing in a fund, and sets out how they should be disclosed to the end investor in a meaningful way, including differentiating known historic costs from estimated future costs. The IA says explicit and implicit costs should both be presented, recognising that not all transaction costs can be quantified with the same degree of accuracy due to their profoundly different nature. It says that different kinds of implicit cost are too often conflated and that has hampered the quality of the disclosure debate, while implicit costs relating to the bid-offer spread should not be disclosed as explicit costs.
It adds that other disclosures should include stock lending and repurchase agreements, financing costs and taxes.
Gina Miller, founding partner of wealth manager SCM Direct, feels that this is still not adequate. "The proposed fund disclosure template we have seen is incomprehensible," she says. "It must be comprehensive: nothing hidden and nothing left out. It excludes a large amount of the transaction costs, adviser fees, platform fees and many other charges."
However, Ben Yearsley, head of investment research at Charles Stanley, says: "It is not a bad thing having full disclosure and seeing what is the true cost of running a fund. But investors can get too obsessed by costs and forget the fact that you are trying to make a return.
"The move from disclosing an annual management fee to an ongoing charges figure, which has already happened, is good. But the key thing missing is fund dealing costs. I would be more inclined to keep this as a separate figure, so that approach is sensible."
The Investment Association invites comments from all interested parties via email to positionpaper@theinvestmentassociation.org
