First post-MiFID II revelations on funds industry’s ‘hidden charges’ emerge

Some three weeks after the European Union’s new regulations governing the way EU fund managers market their funds came into force,  data published today by LangCat, a UK asset management consultancy, suggests investors have been paying more to fund managers in hidden charges than previously thought. 

According to LangCat, of the top-selling 20 funds in the UK in 2016, 13 have been found to have charged investors on average 30% more – and in some cases as much as 85% more – in additional transaction fees than had previously been disclosed to them.

Investors in the JPM Global Macro Opps fund, for example, paid an extra 0.66% of transaction charges on top of the 0.78% they paid in ongoing charges, a difference of more than 84%, the LangCat research reveals. (See chart, below.) Such differences matter more at a time, like now, when average investment returns are relatively low.

Today’s LangCat revelations will not come as a surprise to many observers, who have been warning that MiFID II would hit Europe’s asset management industry hard, and contribute to a further consolidation of the industry, since the added transparency being introduced by the Markets in Financial Instruments Directive updates, known as MiFID II,  will make it harder for the weaker firms to compete.

Last week, Moody’s Investor Service warned that the new, stricter disclosure requirements for costs and charges, alongside new product governance rules, could make it so much easier for investors, independent financial advisers and competitors to analyse and compare investment products that asset managers could be forced to lower their effective fee rate by as much as 10% to 15% over the next three years. This, Moody’s noted, would set in motion a “margin squeeze” that it said would fuel a consolidation of the industry that has already begun.

Under MiFID II, which came into force on 3 January, European investment managers are required to disclose additional transaction costs that are charged to their funds, on top of the established ongoing charging fund (OCF) figure.

Asked to comment on the LangCat findings, a JP Morgan Asset Management spokesperson told International Investment that the asset manager “is using the full PRIPPs [Packaged Retail and Insurance-Based Investment Products] methodology for calculating transaction costs” and that it “support[s] MiFID II’s intent to make it easier for investors to compare fees”.

The spokesperson added: “JPM Global Macro Opportunities Fund OEIC generated total return net of fees over one year to 31 December of 15.98%. Performance is first decile over one year, and first quartile over three years in the IA Targeted Absolute Return Category.

“The fund’s ongoing charges are also in the lowest quartile in its peer group.”

A spokesperson for Woodford Investment Management, which was also included on the LangCat list, said that the fund house’s fee is currently showing on its website as 0.96%, rather than the 1.03% attributed to it by LangCat, and that this amount is “updated each month rather than [the] three-year average” called for by MiFID II.

“Since April 2016 all costs, including transaction costs, have been disclosed on our website and are updated each month to help investors better understand the total, true cost of investing,” The spokesperson added, quoting from a prepared statement issued by the company.

“Investment research costs have been paid by Woodford, rather than by the fund, since April 2016, with no increase to the existing annual management fee.”

Mystery of the ‘zero transaction cost’

In its report, LangCat noted that seven of the top 20 funds it looked at had disclosed their transaction costs as “zero”, prompting, it said, the question as to “whether these funds genuinely have no transaction costs or whether they are being met from company profits rather than [being] borne by the fund”.

In a statement accompanying the LangCat data, LangCat consulting director Mike Barratt noted that the industry has long known that there was “more to fund costs than the OCF”, and that, as recently as 2016, The UK’s Investment Association was calling these additional charges ‘the Loch Ness Monster of investments’”.

“However, in the absence of formal disclosure, this was just speculation, and they had to work with what the fund groups told them,” he said.

“It turns out that Nessie is alive and well, and charging tourists a third more for a photo than they expected.”

As for investors, Barratt concurred with Moody’s prediction that the new transparency would cause many of them to think twice about funds with high charges, particularly if they find they’ve been secretly been paying more than they were told they were.

“Numerous surveys over recent years have shown how people trust financial services at roughly the levels normally reserved for politicians and estate agents,” he said.

“And with fund groups now saying ‘Oh, sorry, when we said we were charging you x, we meant a figure over a third higher’, it’s not hard to understand why.

“This feeling of grubbiness intensifies when you remember just how hard the industry has kicked against being made to step up to the plate and disclose these charges. This is not anything radical – all they are being asked to do is to tell people what it costs to invest with them.

“It’s taken EU regulation to get this out in the open, rather than transparency being the default position.

Now we’ve come this far, we also need those firms who are disclosing a zero cost to explain the basis of their assumptions.”

To read more about the LangCat’s findings on its website, click here. 

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