Wildly differing TERs leaving investors severely out of pocket

The huge difference in charges levied by fund management companies is punching a gaping hole in private investors’ profits, warns fund ratings analyst Moneyspider.com.

New research has found that the so-called Total Expense Ratio (TER) – designed to provide investors with a clearer picture of the annual costs involved in running their fund – varies wildly between fund managers.

The TER typically consists principally of the manager's annual charge, along with a range of ancillary costs for professional fees and services such as trustee fees – and they can cost investors literally thousands over a ten year average investment period. Some funds even have exit fees to further dampen returns.

Moneyspider.com’s research reveals that some well known funds with grim performance over a standard five year investment period are also among the worst offenders in terms of their TERs.

“For example, the popular AXA Framlington Global Technology fund has a high TER of 2.44 and has just managed to scrape growth of 24.5 per cent over five years,” said Moneyspider.com’s Tony Ahearne.

“But if you look at another really popular fund, Invesco/Perpetual’s World Growth Portfolio fund, this carries a lower TER of 1.91 - AXA Framlington's TER is almost 25 per cent higher – and has also delivered a blinding 62.9 per cent profit over the five years,” he said.

“While these fund examples may be in different sectors and can have radically different performance track records, the point is that high TERs can seriously damage your wealth,” he added.

“Old Mutual’s Select Managed has one of the lowest TERs around, just 1.77 per cent, and it has grown by 52 per cent since July 2003.

“Compare this to say New Star’s Technology Unit Trust, which carries a TER of 2.45 per cent and has returned a shocking four per cent growth over five years – meaning investors have lost money because of inflation – then you get to see how the high TER charge compounded by lousy performance is creating real problems for investors,” added Ahearne.

“We recommend that investors ask their fund manager for a precise breakdown of all fees, paying particular attention to the TER.

“A figure of around 2.95 may sound innocuous, but when added up over the years can significantly dent returns,” he warned.

Another big name, dreadful performer and high charger is Scottish Widows Japan Select. A £10,000 investment over five years will have brought investors not only a loss of 0.8289 % (£82.29) but will also have incurred a further loss of 2.17 % per annum in TER.

So £9,917.11 less 10.85% (five times 2.17%) equals a further £1,076 loss, meaning that after five years the £10,000 investment would now be worth only £8,841.10. It is a lose-lose situation for investors in this fund.

“If in doubt, it is probably best to get out,” said Ahearne. “Because even if investment performance improves, a fund with a high TER is always going to be hampered by the impact these charges make over the years.”