IMA New and Improved Fund Fee Disclosures contains more than the usual amount of IMA Fudge

IMA New and Improved Fund Fee Disclosures contains more than the usual amount of IMA Fudge


- IMA’s additional recommended practice is intended to promote understanding of the nature of charges and costs, and transparency.


Truth: Very little has changed – the code is voluntary, not starting for six months, and simply repackages existing partial numbers into a new place made up by a host of different numbers which the IMA refuses to add up to ensure consumers’ understanding is enhanced.



- Wherever the annual management charge is given, the ongoing charges figure should be presented with equal prominence.


This is a major step forward by the IMA as it would prevent the shoddy misleading adverts which in any other field would be banned for being misleading in which the IMA members commonly advertise just their annual fees giving investors the illusion this is a fair representation of the total.



- Where the fund is subject to a performance fee, this should be stated and the percentage of the NAV that was charged in the last financial year should be given alongside the ongoing charges figure.


It is strange that the IMA has not followed the True and Fair campaign suggestion of three year smoothing process to give investors a better indication of a normal performance fee.  Furthermore by not having ONE number including such costs, few investors will see it, add it to the other costs and therefore be able to properly compare one fund with another.



- IMA recommends additional disclosures about the portfolio transaction costs necessarily incurred in buying and selling investments for the fund. Three year average figures for broker commissions and transfer taxes (such as stamp duty) should be presented separately as percentages of the NAV. Additional disclosures should be given to explain the significance of these costs and the bid-offer spread.


By not having ONE number including such costs, few investors will see it, add it to the other costs and therefore be able to properly compare one fund with another.


The IMA then deliberately confuses and obfuscates things by encouraging funds to produce part of the actual dealing costs (the taxes and commissions) calculated as a percentage of the fund.  It then separates the other part of dealing costs, the spreads of securities, not by quantifying the actual amount in any year and dividing this by the fund value, but by calculating it as a percentage of a transaction.


Although this is a more in the right direction investor will still need a scientific calculator to calculate the total cost of investing.  Under the new IMA recommendations, the investor needs to work out the spreads supplied, multiply it by the average % of the fund traded and then divide this by the average size of the fund.  They then need to add this to the new dealing cost figure to be supplied, in order to determine the real genuine dealing cost figure.  Once this has been calculated one then needs to add the initial costs, exit costs, performance fee figures to the so called ‘ongoing charges’ figure to provide the actual costs.


For example, one of the UK’s largest Corporate Bond Funds disclosed in its October 2011 Annual Accounts that it had bought £6.2 billion of bonds and sold £5.9 billion of bonds but “that there were no significant transaction costs during the year“.  The new IMA code, even if adopted, would reveal in this case that buying £1,000 of bonds might incur a spread of x%, but it does not reveal this cost as a percentage of buying £1,000 of the fund, it therefore has little value.  One needs to then know how much of the fund is actually turned over each year.  The IMA stopped its members having to produce precisely this information in June this year!



- Existing IMA guidance on stock lending – stock lending income received by the fund should not be used to reduce the ongoing charge figure. Also, where stock lending income is shared with another party in order to subsidise the cost of the service provided by that party, that party’s share of the stock lending income should be included in the calculation of the ongoing charge.


This is bizarrely idiotic – take an example of a fund that say has £1m of costs but normally receives £100,000 net of securities lending income.  The IMA seems to think the right measure of its ongoing cost is still £1m!  Furthermore if say that fund pays an outside company £50,000 to derive £150,000 of such income into the fund, the IMA thinks that the right ongoing charges figure is now £1,050,000 rather than the sensible figure of £900,000 (i.e. £1m + £150k – £50k).



- Comparing portfolio transaction costs for a range of funds may give a false impression of the relative costs of investing in them for the following reasons: Transaction costs do not necessarily reduce returns. The net impact of dealing is the combination of the manager’s investment decisions and the associated costs of investment. Historic transaction costs are not an effective indicator of the future impact on performance


More nonsense from the IMA.  Numerous academic research and SCM’s own research shows that funds with high turnover actually produce the worst performance. In the 5 years to end June 2012 SCM has found that the least active 25% of UK equity funds beat the most active 25% of active funds by 1.2% pa – why? Because the extra costs of sometimes manic trading did not offset any extra returns of the new investments. But this should not be the point; the point is that people are entitled to know how much it’s costing.


Gina Miller stated “We should applaud the IMA’s acknowledgement that fund managers should go beyond minimum standards of disclosure. But today’s suggestions go nowhere near what the True and Fair campaign has been calling for almost a year. Is it really too much to ask a fund manager to tell customers where their money is invested and what they are being charged for? Sadly judging by today’s thinking from the IMA the answer to that question is still yes.”

Posted By: True and Fair, 4:30 pm

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