When it comes to fund charges murky doesn’t even come close. Here’s my attempt to lift the lid of Fund charges and clear the muddied waters a bit.

Up front fund charges
There are some fund charges that you pay up front and are usually deducted directly from the amount invested at outset. A few of the ones you need to look out for are:

Initial fund charges – these are straightforward but can be high, sometimes very high.  Historically they were used in part to fund the advisers’ commission. However, now that commission is banned be aware of high fees. There’s no need for them. It should be possible to invest with minimal (if any at all) initial fees.

Dilution levy – This is one of the good fund charges.  The purchase of UK shares is subject to Stamp Duty Reserve Tax (SDRT). Some funds require all investors to pay their share of SDRT on their way into a fund. This is the dilution levy and is the only fair way to do it. The funds that don’t charge a dilution levy will pay the tax bill from the fund itself – penalising the investors who remain invested. It’s a bit like being expected to pay for someone’s food at a group meal because they’ve left before the bill has arrived.

Ongoing fund charges
There are a number of factors that affect the size of ongoing charges. As you might expect with the UK fund industry it’s not at all simple.

Annual Management Charge – the AMC is one of the charges quoted in the fund literature. This is the charge that you know you will pay. To put it another way, this is the minimum charge you will pay going forward. It’s a guaranteed minimum annual fee.

Ongoing Charges figure – The OCF has replaced the Total Expense Ratio (TER), which was a bit of a misnomer being neither a measure of total expenses nor a ratio. The OCF is a measure of the total costs associated with managing and operating the fund as well as some of the variable costs associated with running the fund during the the last reporting period. It includes the AMC along with legal fees, auditor fees and other operational expenses.  It is only known at the end of a funds reporting period. The size of the OCF is important to investors because it gives an indication of how much of the investor’s money was spent by the fund manager during the last reporting period.

It is worth noting that the OCF doesn’t include all fees paid from the fund. There are other fees and charges not included in the OCF…

Other charges – There are other fees incurred by the fund that do not have to be included in the OCF calculation. One of these being stockbroker fees. These are incurred when the underlying holdings of the fund are bought and sold by the fund manager. So an important measure here is portfolio turnover rate (PTR). This is how much of the portfolio the fund manager trades during their reporting period. The more of the portfolio that is traded, the higher the stockbroker fees will be. Keep an eye on PTR: I have seen PTRs over 100 percent. That’s the entire fund holding sold and bought in a single year!

Redemption fund charges
Exit fund charges – Sometimes a fund will charge investors when they sell or redeem shares and is typically used to offset fund costs associated with a shareholder’s redemption.

Bid offer spread – not really one of the explicit funds charges but it does reduce the value of your investment. You will have already experienced it if you’ve ever ordered foreign currency and then returned the surplus at the end of your vacation. The rate the exchange bureau sells the currency to you is higher than the rate they’ll buy it back off you. This margin funds their business. In the fund management world this is the bid offer spread and it  is a measure of liquidity. The difference is pocketed by the broker or fund manager. Either way it’s a charge.

Summary
Hopefully that’s cleared it up. It is important to keep the AMC (funds charges that you will pay going forward) and the OCF (fund charges that were actually paid looking back) as low as possible. Remember that there may be additional fund charges not included in the OCF.

How low is low for fund charges? At the time of writing (August 2017) our most expensive portfolio has an AMC of 0.29% and a TER 0f 0.38%. If you’re paying much more than that you really should give us a call on 01666 861194.