Emma Wall: Hello, and welcome to the Morningstar series, Ask the Expert. I'm Emma Wall and here with me today is Mark Polson of the Lang Cat to talk about charges.
Hello, Mark.
Mark Polson: Hi, Emma.
Wall: So this is the first of a mini-series about charges and I thought we'd start with charges on retail funds those that affect private investors looking for funds for their ISAs, funds for their SIPP. We have this new thing that's been proposed called the OCF, what exactly does that mean?
Polson: It's another acronym, which is expressly designed to confuse retail investors, so that's pretty good. The figure that most investors look at when they're comparing funds is the annual management charge. And so, if you are looking through an investor publication or visiting perhaps many fine websites that people can go to analyse investments, then you'll see AMCs listed, and it's a natural point of comparison because it's very hard to use past performance as a guide to the future. We've an industry geared to telling you not to do that but charges are certain, so people do like to compare.
The problem with the annual management charge is it only tells you a relatively small part of the story. And actually the annual management charge figure is often massaged by fund management houses because they know people compare. So if you make your fund 0.6% and everybody else's is 0.75% or something like that, then that's brilliant, right? It's 0.15% cheaper that must be good.
But actually there's lots and lots of other charges that go into funds. And up until recently, we've used a second figure in the industry called the TER, or total expense ratio, which is another stupid acronym, and that brings a few more costs in. So it's some of the additional expenses.
Now fund managers disclose those, but usually in very, very small writing. Right at the bottom of a fact sheet, where they can't possibly do any damage, but those additional expenses can be quite dramatic. It could be in some cases 0.2%, 0.3% that's get added on to the annual management charge. So if you want to know what the fund is charging then you need to add those two together. That was the TER.
The OCF or ongoing charge figure, because we haven't had a new acronym for a while, so it’s time, is an evolution of TER. It brings in another couple of costs that fund managers charge to the fund, but it still isn't the whole story and the big figure that any of these definitions miss out is the cost of portfolio turnover.
Now that can range from a very small amount, if the fund is very stable and doesn’t trade all that often up to a very, very large amount of costs that's charged back against the fund.
Now you have no way of knowing as an investor what those costs are. They are not disclosed. Some houses are good and give you – try to give you an idea, most don't. And there are other fees as well, which to be fair to the fund managers are pretty hard to put in a percentage. So, your fund has to get audited. So, you've got some auditor fees in there, well, how to do you say what that's going to be and the cost of an audit can change from one year to the next.
So there is some difficulty inside getting a total cost for a fund. OCF is as close as we've got, but I think the main thing for anybody trying to compare funds is for the love of the Wee Man don't use AMC as your point of comparison, because you are absolutely playing into the hands of the marketers.
Wall: Mark, thank you very much.
Polson: That's a pleasure.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
