Investment company charges fall for 4th consecutive year

The economic turbulence and market volatility has made for a challenging year for the investment company sector.

So it's encouraging that research from the Association of Investment Companies (AIC) amongst 239 conventional investment companies (excluding VCTs) using Lipper data suggests that charges (measured by the Total Expense Ratio - the TER) in the investment company sector have fallen for the fourth consecutive year in a row.

Some 34% of conventional investment companies have charges under 1%, compared to 30% just over a year ago, whilst some 70% of conventional investment companies have charges under 1.5% compared to 67% previously. Meanwhile, the average charge in the conventional investment company sector is currently 1.41% compared to 1.44% previously. The figures do not take into account performance related fees, which crucially are only paid if an investment company outperforms by a pre agreed margin.

Annabel Brodie-Smith, Communications Director, Association of Investment Companies (AIC) said: "Whilst charges are only one of several factors to bear in mind, in volatile markets their impact can feel all the more pronounced. So it is very encouraging to see that investment company charges have remained, on average, extremely competitive.

"In recent years, charges have come down due to rising assets, ensuring that investors benefit from economies of scale. There has also been a trend towards reducing management fees and introducing performance fee arrangements. Whilst markets recently have been much more volatile, investment company boards are clearly continuing to keep an eye on charges during these difficult times."

The lowest cost investment company sector is the UK Growth & Income sector (0.8%), followed by the Global Growth (0.88%) and Global Growth & Income (0.97%) sectors. The UK Growth & Income sector has the highest proportion of investment companies with charges under 1% (78%). The Global Growth & Income sector had the second highest proportion of investment companies with charges under 1% (67%) followed by the Global Growth sector (63%).

The lowest cost AIC members are: The Independent Investment Trust PLC (0.23%), Edinburgh US Tracker Trust plc (0.33%), Blue Planet Financials Growth & Income Trusts (0.35%), The City of London Investment Trust plc (0.37%), Edinburgh Investment Trust plc (0.40%), The Law Debenture Corporation p.l.c. (0.47%), Bankers Investment Trust PLC (0.47%), Temple Bar Investment Trust PLC (0.51%), Scottish Mortgage Investment Trust PLC (0.52%), Alliance Trust PLC and Foreign & Colonial Investment Trust PLC (both 0.52%).

When performance related fees are taken into account, comparative charges have come down further still. The average TER with performance fees included is currently 1.56% compared to 1.75% a year ago, most likely because during the recent market turbulence fewer investment companies have paid a performance fee. In February 2009, 51% (122 by number) of the investment company sector had a performance fee in place, of which 58 paid a fee. This compares to November 2007, when 49% (103 by number) of investment companies had a performance fee in place, of which 70 paid a fee.

Annabel Brodie-Smith, Communications Director, Association of Investment Companies (AIC) continued: "Given the market volatility over the last year, it's not surprising that the number of investment companies paying a performance fee has reduced significantly. But it does illustrate how sensibly set performance fees can work to investors' benefit, since they only pay more if the investment company outperforms by a pre-agreed margin."