IMA: Defending the Indefensible.

In the latest article by the IMA which they are again defending the indefensible, we thought it would be helpful to write a layman’s guides to their article and version of the truth.

IMA: The myth of excessive fund charges, Money Marketing, 12 March 2012

True and Fair View

- IMA: Defending the Indefensible.  A translation of the recent IMA speak into English.

The IMA said: The fund management industry has been under attack recently over charges. There’s nothing wrong with that – as an industry we should be able to answer any accusations leveled against us. What is wrong, however, is the way in which the campaign against the industry has been built up around a series of myths that have been lapped up by the media.

The fund industry has the answers but the old adage rings true, never let truth get in the way of a good story.

I would like to take this opportunity to separate the facts from the myths:

1. Fund managers conceal the cost of trading.

No, they do not. Trading costs are published in a fund’s annual report and accounts by law. European regulators have carefully considered what should be disclosed as part of fund charges and they are very clear as to why trading costs have to be considered separately. Whether this is enough or whether more could be done is another issue. The point is that they are not hidden.

True and Fair view:  According to the Oxford Dictionary, hidden means kept out of sight; concealed’ or  ‘a hidden object or place is not easy to find’.  Some but not all of the trading costs are revealed in the notes to the annual accounts, these are not normally published on-line, not calculated as a percentage of the fund, and not included within either the headline annual management charge or even the so called Total Expense Ratio. 

It is therefore according to the English language, hidden.

2. Trading costs are too high and managers ’over-trade’ as a consequence.

The IMA said: The first point about this is that a fund manager trades in an attempt to increase the value of the investor’s portfolio. Second, the fund manager receives no financial benefit from trading. More important, any positive benefit from trading goes straight to the investor.

Successful trading improves investment return. For my management fee I expect the fund manager to trade each time he sees an opportunity.

True and Fair view: Of course every fund manager will trade to seek an opportunity.  Sadly, nobody can guarantee a profitable trade.  SCM research actually matches academic research that shows when a manager trades too much, the investors suffer.  A 2004 study, entitled Portfolio Transactions Costs at U.S. Equity Mutual Funds found that ‘fund investors bear substantial portfolio trading costs. Equity funds incur an average annual explicit brokerage commission of 38 basis points and an average annual implicit trading cost of 58 basis points… We suspect that many mutual fund investors are completely unaware of these trading costs and simply assume that the reported expense ratio includes them.’

In fact we can reveal that if you were to invest in the 20% of actively managed funds within the popular IMA UK All Companies sector (i.e. UK equity funds) with the highest rather than lowest recently reported portfolio turnover (found using Morningstar) it would have cost you 3.9% in 2011, 2.3% pa over the last 3 years and 0.9% pa over the last 5 years.    

However, as the IMA knows full well, this misses the basic point – nobody invests in the average fund, they invest in a fund and are entitled to know all the costs of THE fund they invest in.  This is called being honest and transparent. 

3. Trading costs eat into investors’ returns.

The IMA said: No market can be accessed for free so trading costs will always be a reality. Recent IMA research proves that net performance shows the difference between the market return and the investor return is broadly the same as the total expense ratio.

It can be misleading to look at trading costs without understanding the difference they have made to the value of your investment. We will be publishing more on this shortly.

True and Fair view: : The IMA is once again relying on  misleading research – the fact of the matter is that their research actually proved nothing since once again they set out to compare apples with pears.  As it happens using the IMA’s own research over 5 years rather than 10 years would have doubled the gap between actual performance and the index from 0.7% pa to 1.6% pa as the IMA stats ignore many of the badly performing funds that have not lasted the full 10 years before either being closed or merged with another fund.  Over the coming weeks there will be further ‘independent’ research produced by the IMA to once again prove that there are no hidden dealing costs, the world is flat, and the moon is made of cheese.

Does this prove anything? No.  The fact is there are costs; the fact is that most consumers cannot see let alone calculate them, and the fact is until the IMA recognises this it remains in total denial. We suggest the first step for the IMA would be to recognise reality.


4. You are better off avoiding funds.

The IMA said: Not so. Fund investors benefit from pooling their money with each other so it works out a lot cheaper than DIY investing.

If you invested £10,000 directly in all the companies of the FTSE 100 it would cost you about £1,250 to buy the shares from a broker. Funds are likely to charge about £10 for the same trades and offer a much cheaper way of accessing those shares.

There have been a lot of big numbers bandied around, some of which have been calculated in a dubious manner, all of which are being used to paint the industry in a bad light.

As a leading IFA recently commented, the debate is focusing on the wrong thing. Surely, the number that matters to the individual investor is the net performance.

True and Fair view: We have never said to avoid funds – this is the IMA putting words into our mouths; as they do when they suggest we are saying transparency equates to lowest cost.  Funds serve a great purpose in terms of pooling investments efficiently for investors.  What we are saying is that consumers should have the right to know how much something costs BEFORE rather than AFTER they invest.  They can then make an informed decision balancing the underlying return of the index BEFORE costs against the TOTAL costs to determine whether it is worthwhile to invest with a particular investment or savings adviser or not.  In our view not telling consumers how much something cost until they come to sell it is thoroughly dishonest.

We have also said that the industry needs to publish on-line and regularly the FULL holdings because the money belongs to the consumer.  This has been the law in the US since 2004.  The IMA talks about transparency but then does precisely nothing.  If it could see further than the end of its nose, it might actually see it would be in its own self-serving interest (given that its revenues come from fund managers) to help fund managers by encouraging them to act honestly and transparently, which according to our consumer research would lead to 60% saving more.

Why does the IMA waste its time with nonsensical arguments, nonsensical statistics instead of starting to do the right thing for consumers, which might actually be the right thing ultimately for their members?

Why is the IMA so scared about its members telling investors two simple truths – how much it really costs to invest their hard earned money and where it is really invested?




Posted By: True and Fair, 6:46 pm

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