Charges continue to fall in conventional investment company sector

In turbulent markets, the impact of investment charges can feel more pronounced than in a rising market. Yet whilst fund charges have reportedly been creeping up in recent years, research from the Association of Investment Companies (AIC) using Lipper statistics suggests that the conventional investment company sector, 212 companies (excluding VCTs), has bucked the trend yet again, with charges on average coming down for the third year running.

The average Total Expense Ratio (TER) excluding performance related fees in the conventional investment company sector is currently 1.44%, compared to 1.55% a year ago and 1.6% two years ago. Meanwhile, the proportion of investment companies with TERs under 1% has also continued to grow, from 25% two years ago, 28% a year ago, to 30% today. Nearly a third of conventional investment companies have TERs under 1%.

Of the 10 AIC Members with the lowest charges overall, 7 were to be found in the Global Growth sector. Yet whilst the Global Growth sector, with 29 companies has the lowest average TER of 0.91% after the Overseas Growth sector (0.89%, although there are only 3 investment companies in this sector), the UK Growth & Income sector, with 18 companies housed the highest proportion of investment companies with charges under 1% (72%), whilst every company in this sector has a TER under 1.5%.

The Global Growth and Income sector (6 companies) is also amongst the sectors with the highest proportion of investment companies with charges under 1% (67%), followed by the Global Growth sector, where 90% of investment companies have charges under 1.5%. Meanwhile, in the UK Growth sector (20 companies), 40% of investment companies have charges under 1%, whilst 75% have charges under 1.5%.

Some 48% of the investment company sector (ex VCTs) now has a performance fee in place, but crucially, these are only paid if an investment company outperforms an agreed benchmark by a pre-agreed margin. Last year, some 66% of investment companies with performance fee arrangements in place paid a performance fee.

Edinburgh US Tracker Trust was the lowest cost AIC member, with a TER of 0.29%, followed by Independent Investment Trust plc (0.31%), Alliance Trust plc (0.41%), City of London Investment Trust plc (0.41%), Edinburgh Investment Trust (0.42%), Bankers (0.42%), Witan Investment Trust plc (0.46%), Foreign & Colonial Investment Trust plc (0.51%), Law Debenture Corporation (0.51%) and Scottish Mortgage Investment Trust plc (0.52%).

Annabel Brodie-Smith, Communications Director, Association of Investment Companies (AIC) said: “In volatile markets, the impact of charges can be all the more acute, so whilst only one aspect to bear in mind, they are all the more relevant in these turbulent times.

“It’s interesting that the investment company sector has bucked the trend with charges coming down. Competitive charges are just one of the qualities that many investment company investors hold dear, and it’s encouraging that this is still very much a strong feature of the sector.

“Charges have come down for a number of reasons. Firstly, rising asset values over the last few years have helped investors benefit from economies of scale. There has also been a move amongst investment company Boards to reduce the management fee and introduce a performance related fee. Performance fees are only paid if an investment company outperforms by a pre-agreed margin, meaning that sensibly set performance fees can align shareholder and fund manager interests.”