The true cost of investing in popular funds

New figures have revealed that the total cost of investing in some of the UK's most popular funds is almost double what investors think they are paying.

Under new regulations that came into force this month asset managers must now disclose all the hidden charges associated with their funds, which means many have had to reveal that investors are paying far, far more than they might think.

Mifid II trading rules mean fund companies can no longer simply provide an ongoing costs figure to cover the additional fees involved in running a fund. They must now list the total cost, including transaction or trading costs and other charges.

Now that the total costs are being produced it is becoming clear that some funds have total costs that are almost double the quoted ongoing costs figure.

“It is undoubtedly good that this clarity is here now," Mike Barrett, director at consultants Lang Cat, told the Financial Times.

"But it is grimy that it has taken some EU regulation for asset managers to tell investors what the true cost of investing is.

"It is a long time coming for us all,”

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The worst offenders

Lang Cat and FT that pulled together the new figures and analysed them to reveal the funds that are charging particularly high fees.

Many investors are paying almost double the ongoing costs figure (OCF), with that rising to four times as much in some cases if you include platform charges and performance fees.

One of the worst offenders is the Janus Henderson UK Absolute Return fund. It has an OCF of just 1.06% plus transaction costs of 79p for every £100 invested.

If you add in platform fees and a performance fee the total cost of investing leaps to an average of 3.82% a year if you invest via Hargreaves Lansdown one of the most popular fund supermarkets.

The total cost of investing in Neil Woodford’s equity income fund is 1.33% a year via Hargreaves Lansdown, over double the 0.75% OCF.

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The true cost of investing

Fund	OCF (%)	Transaction costs (%)	Total cost of ownership (%)
Fundsmith Equity	1.05	0.05	1.10
Woodford Equity Income	0.75	0.28	1.03
Blackrock Cash	0.32	0	032
Invesco Perpetual Global Target Returns	0.88	0.35	123
Vanguard LS 60% Equity	0.22	0.11	0.33
Henderson UK Absolute Return	1.06	0.79	1.85
Lindsell Train UK Equity	0.72	0	0.72
JPM Global Macro Opps	0.78	0.66	1.44
Lindsell Train Global Equity	0.75	0.01	0.76
Old Mutual Global Equity Absolute Return	0.85	0.40	1.25
Vanguard LS 40% Equity	0.22	0.12	0.34
Old Mutual Cirillium Balanced	1.62	0	1.62
FP Balanced Portfolio Overlay	0.67	0	0.67
Fidelity Moneybuilder Income	0.56	0.18	0.74
Investec UK Alpha	0.83	0.64	1.47
Aviva Investors Multi-Strategy Target Income	0.85	0.25	1.10
Troy Trojan Income	1.02	0	1.02
Old Mutual Cirillium Moderate	1.66	0	1.66
L&G Global Inflation Linked Bond Index	0.27	0.22	0.49
Dimensional Global Short Dated Bond Fund	0.29	0	0.29

Souce: Lang Cat and FT Analytics

Is this the start of transparent investing?

The response to the arrival of the Mifid II trading rules has been mixed with some fund houses embracing the call for transparency and others still muddying the waters.

Vanguard has published a simple document on its website explaining to investors that once transaction costs are factored in it can double the cost of investing in some of its funds and platform costs can quadruple fees.

“If this disclosure can help clients get more accurate numbers and make it easier for them to make investment decisions, that can only be a good thing,” says Nick Blake, head of personal investing, at Vanguard told the Financial Times.

Other asset managers have opted to produce complicated spreadsheets.

Whereas some, including BlackRock and Legal & General Investment Management, have opted for a dubious strategy of stating that their funds have negative or zero trading costs, which may suggest their figures aren’t particularly accurate.

“It is unclear yet whether these funds genuinely have no transaction costs or whether they are being met from company profits rather than borne by the fund,” says a spokesperson for Lang Cat.

The next step is getting firms who are listing zero transaction costs to explain why. But, given how hard many firms fought to try to prevent the new transparency rules coming in it could take a long time to make that next step.