Almost a third of investment companies have low charges, new research shows

News - Banking

Written by Ray Clancy

Wednesday, 07 July 2010 08:17

Almost a third of investment companies have charges of less than 1% per year but there has been an increase in the number of specialist companies with higher charges, new research shows.

Some 60% of Global Growth investment companies have charges under 1%, 58% of UK Growth and Income investment companies have charges under 1% and 57% of Global Growth and Income investment companies have charges under 1%. While 58% of investment companies have charges under 1.5%, the research from the Association of Investment Companies shows.

It looked at 251 conventional investment companies (excluding VCTs) using data from Lipper, a Thomson Reuters company, and found that overall almost 30% of investment companies have charges under 1% as measured by the Total Expense Ratio - the TER, and 58% of investment companies have charges under 1.5%.

The figures do not take into account performance related fees, which crucially are only paid if an investment company outperforms its benchmark by a pre-agreed margin.

The more retail orientated sectors tend to house the highest proportion of investment companies with charges under 1%, with the Global Growth sector leading the way at 60%. This was followed by the UK Growth & Income sector at 58% and the Global Growth & Income sector at 57%.

The lowest cost AIC member was Edinburgh US Tracker Trust, from the North America sector with a TER of 0.38%. This was followed by City of London Investment Trust at 0.43%, Independent Investment Trust at 0.44%, HGCapital Trust at 0.47%, and Law Debenture Corporation at 0.49%.

The Scottish Mortgage Investment Trust came in at 0.51% as did the Edinburgh Investment Trust, followed by Bankers Investment Trust at 0.52%, Marwyn Value Investors at 0.53% and Temple Bar Investment Trust at 0.56%.

The research shows that there has been an increase in the number of specialist investment companies with higher charges which has led to an increase in the overall average TER. Notably the Property sectors have increased in size from 13 companies when the survey was last completed to 18 companies in January 2010 and the Hedge Funds sector increased from nine to 15 companies in January 2010.

This is reflected in the average investment company TER which is now 1.76% in comparison to 1.41% in October 2008, 1.44% in June 2007, 1.55% in 2006 and 1.6% in 2005, the report says.

‘The retail orientated investment company sectors continue, on average, to offer investors excellent value for money. Whilst charges are only one of several factors to bear in mind, they are an important consideration,’ said Ian Sayers, director general of the Association of Investment Companies. Total expense ratios are published on the AIC’s website for all individual Member companies.

‘Over the past couple of years there has also been a significant increase in more specialist investment companies which tend to have higher charges. Investors need to consider this alongside the other investment criteria when making their investment decisions,’ he added.

When performance fees are taken into consideration the average TER with performance fees included is 1.83% in comparison to 1.56% in October 2008 and 1.74% in June 2007.

The research also shows that in January 2010 some 54% of investment companies had a performance fee in place, 135 by number, and 44 companies had actually paid a performance fee. In comparison in the year to the end of October 2008, some 51%, 122 by number, of the investment company sector had a performance fee in place, of which 58 paid a fee.