Vanguard's Richard Withers says while transparency and the ability to compare charges is desirable, investors will only find such disclosures relevant if they are able to compare apples with apples.
The UK’s retail distribution review put fees and their disclosure in focus for the retail market. While pension schemes were beyond the remit of RDR, interest in the issue has increased among institutional investors, especially with the coming MiFID II proposals on cost and charges disclosures.
Keeping costs low is logical for investors. With many defined benefit pension schemes struggling with inadequate funding levels, it makes sense to minimise costs to help maximise scheme assets.
Whichever investments you choose, you increase the scheme’s chance of success by focusing on lower-cost funds. All things being equal, an investment fund with lower total costs will outperform one with higher costs.
Enhancing disclosure
Because costs are one of the few things an investor can control, it is particularly important to be able to make fair comparisons on cost – and therein lies the challenge for investors and the industry: how to make cost figures meaningful and comparable.
Transaction costs, for example, are difficult to quantify accurately. While some are explicit, others are implicit, which means many figures are estimates
The UK’s Investment Association has set out recommendations to managers of UK-authorised funds on what to disclose regarding charges for investors.
In this enhanced disclosure on costs, charges are split out into those paid by investors and the costs paid by the fund.
The investor charges comprise entry and exit fees and the ongoing charges figure. The OCF is prescribed by regulation and covers the day-to-day costs of running the fund and is based on the actual fund expenses for the latest financial year.
It includes charges for investment management, custody, fund accounting, audit, transfer agency, trustee and tax reporting.
In some cases there can be additional costs that are relevant for investors. For example, we also disclose any stamp duty reserve tax charges.
The fund costs, meanwhile, generally relate to portfolio transaction costs such as broker commissions, estimated dealing spread, stamp duty and other transfer taxes. They are charged directly to the fund and will detract from fund performance.
Making it meaningful
We welcome any moves to make costs more transparent. The challenge for investment managers is to make sure we share information that is meaningful.
Currently, like-for-like comparisons between different funds may not be appropriate as some fund costs can be calculated in a variety of ways, and different firms may legitimately use different methods.
Transaction costs, for example, are difficult to quantify accurately. While some are explicit, others are implicit, which means many figures are estimates.
They can be calculated using different methods, such as implementation shortfall and volume-weighted average price, and these different methods can produce very different results.
With the current regulatory and industry focus on cost disclosure, we hope that the inconsistencies will be ironed out and that investors will have clearer information on costs.
To be meaningful, cost information should be quantifiable, objective and comparable.
This helps investors understand the impact costs can have on a scheme’s assets and hopefully will lead to better investment outcomes for scheme members.
Richard Withers is senior counsel, regulatory affairs, at Vanguard Asset Management
