Buy one, pay for two? Or The Law of Averages
Big funds are more likely to be making their managers rather their investors rich. Fact.
Data from the Investment Management Association (in their latest Annual Survey) shows that the average fund size (mean) in 2001 was £126.5m whereas by 2010 it had grown to £278.8m. Data from Lipper shows that the average Total Expense Ratio (TER) has risen over the same period from 1.5% to 1.7%.
This means the average fee charged to manage the average fund has grown in ten years from £1.89m to £4.74m in ten years.
|Mean size £m||126.5||278.8|
|Mean fee %||1.5||1.7|
|Source: TCF Investment|
This 250% fee rise is equivalent to 9.5% pa. Inflation over the period has been about 30% or 2.65%pa.
Investors will find it hard to understand why the fees don’t go down as fund gets bigger. The costs of running a £300m fund are not three times those of running a £100m fund, assuming the fund manager’s salary hasn’t tripled.
The IMA survey also shows that since 1993 the main driver of fund growth has been net inflows (i.e. investors saving more) rather than asset performance. This means that investors are putting new money into funds faster than their managers are creating value and they are being charged an ever increasing fee for the privilege. This would not be allowed to happen in other industries. Consumers and advisers need to put much more pressure on expensive funds – by moving their money to cheaper ones.
If the average fee of the average fund goes down then the average investor will be better off. Fact!