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Many fund charges could breach 1% norm, warns analyst

Calculating fund feesMany active fund charges would rise to above 1% – the fee level generally seen as acceptable – if the UK regulator makes changes to the way charges are reported, research suggests.

Fitz Partners warned that funds would become more expensive should the Financial Conduct Authority (FCA) force asset managers to include transaction fees in the standard ‘ongoing charge figure’ (OCF).

The OCF has become a widely used way for firms to report fund costs to customers – but it does not include the transaction costs generated by portfolio managers’ buy and sell orders.

Fitz Partners found that transaction costs in UK-domiciled active equity funds have in fact fallen by 20% since 2014 as portfolio turnover stayed relatively stable and assets under management increased.

But including these ‘invisible’ transaction costs – which are 0.20% on average – in the OCF could push many so-called ‘clean’ share classes to over 1% in the official All Companies fund category.

Hugues Gillibert, Fitz Partners chief executive officer, warned that the FCA could force asset managers to include transaction cost in the OCF in its final report into the UK fund industry, which is expected this month.

“Although these charges are not usually disclosed to investors, they would have an impact on overall fund performance and are monitored internally by asset managers,” he said.

Currently, 77% of active funds with clean share classes in the UK All Companies sector show OCFs under 1%, which “some investors in the UK might now consider as a ceiling when it comes to acceptable fund charges”, said Fitz Partners.

With the addition of transaction fees to OCFs, Fitz Partners says only 28% of active funds in this sector would remain below a total fee ceiling of 1% and this could cost firms 30% of management fee revenue if they felt compelled to keep OCF figures the same.

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