Why we avoid some fund managers

Justin Modray

Published on 28 April 2017

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It goes without saying that we avoid recommending fund managers we don’t think are very good at their job. But we are also loathe to recommend fund providers who appear to profit from inflated expenses claims against their funds. Let me explain.

While fund charges can be complex, in simple terms there’s an annual management charge (the fee for managing the fund) and a few more minor ancillary charges. These combined make up the fund’s annual ongoing charge figure (OCF), which is the figure you should always look to use when comparing annual fund charges.

The ancillary charges typically include fees paid to custodians (who safeguard the fund’s assets), auditors and the fund provider for administration services (primarily keeping a register of fund holders).

As a rule of thumb, a typical actively managed fund might have an annual management charge of 0.75% plus other ancillary costs of c0.05% - 0.10%, giving an OCF of 0.80% - 0.85%.

We normally expect fund provider administration expenses to be minimal, especially since most funds are sold via investment platforms these days (which removes most administration away from fund providers). But not all fund providers appear to be playing fair, with M&G and Jupiter being prime examples.

M&G and Jupiter both admit to charging blanket percentage fees to cover administration expenses, with any surplus retained by them rather than being rebated back to the funds. This appears to be blatantly unfair to customers. If a fund’s value increases by 25% due to rising markets then M&G’s and Jupiter’s expense claims will also rise by 25% even though those costs are relatively fixed. And when they claim too much they keep the excess, rather than give it back to fund holders.

Morally this is very questionable. And the numbers are not insignificant. By our estimates, M&G is taking over £90 million a year in administration charges from its funds and it’s very hard to see how the administration expenses they actually incur are anywhere near this.

Sharp practices like this are against everything we stand for, so we always seek to avoid them wherever we can.