Fund transaction fees, measured as a percentage of funds’ assets, can be as much as 500 percent of the quoted Ongoing Charge Figure (OCF), according to new research from independent London-based fund research company Fitz Partners.
Fitz Partners calculated transaction fees from audited fund accounts and measured the impact they would have on funds’ OCFs, should both costs be aggregated in one single measure. However, the relative increase in OCF due to the addition of transaction or trading fees depends on asset class or product types. OCFs would increase on average by 21 percent for an equity fund, 29 percent for index trackers and 26 percent for ETFs.
“Adding 20bps of trading fees to an OCF of 100bps is not really welcome, but certainly not as impactful as adding the same 20bps to a lower OCF of say 25bps,” said Hugues Gillibert, chief executive of Fitz Partners. “In the last few years, most funds including ETFs have been lowering their OCFs quoted to investors. With the implementation of MiFID II, trading costs will become more transparent and allow investors to refine their investment choice.”
Fitz Partners highlighted that the relative size of trading fees compared to OCFs is significant for some of the cheaper products. It can represent an extra cost five times their disclosed annual charges, and in some instances can bring ETFs overall costs over those of some active funds. The research also showed that a quoted OCF on its own is not a full reflection of fund costs, and trading costs can challenge the perception of some fund products being always better value.
“The industry will benefit from further transparency on trading costs and it would be best disclosed at the point of investment alongside the fund’s OCF and subscription charges as well as platform fees. Equity funds remain the asset class with the highest average trading fees at 20bps, a level still below most platform fees,” added Mr Gillibert.
“Our research shows that whatever the product, managing money requires transactions and attracts costs. The growth in Smart Beta ETFs is one of the reasons for the overall increase in trading costs for ETFs. Remarkably, index tracker funds remain on average better value after trading costs, when comparing with ETFs.”