Fund fees jump due to trading surge

Savers are shouldering the cost of a pandemic trading frenzy, reports Sam Benstead

Investors have been hit by a surge in fund fees after managers racked up transaction costs overhauling their portfolios. Telegraph Money has found almost 150 funds whose hidden costs exceed the main advertised charge, a sharp jump from 93 two years ago.

These funds incurred heavy transaction costs as a result of the manager’s response to pandemic market falls. Such charges are not included in headline fees but are ultimately paid by investors.

In some cases these costs, incurred by fund managers when they buy and sell investments, were as much as four times higher than their advertised “ongoing charge” figures.

Some of the worst culprits included funds run by Liontrust. The group’s £415m Income fund incurred 2.84pc in trading fees on top of an ongoing charge of 0.88pc, while investors in its £ 250m European Strategic Equity fund were hit by transaction costs of 4.34pc on top of a 1.75pc headline fee. The £990m Liontrust Sustainable Future UK Growth fund racked up transaction costs of 1.29pc, well above its 0.87pc ongoing charge.

A Liontrust spokesman said the high transaction costs were the result of fund managers trading in reaction to the pandemic, as well as a surge in the cost of buying and selling shares in the worst of the stock market volatility.

“While greater costs are never to be welcomed, fund managers increased trading with the aim of benefiting investors,” he said.

“The Income fund switched many of its positions when many companies announced that they were no longer going to pay dividends to ensure that investors in the fund still received the income they needed.”

Research by AJ Bell, a broker, into funds with more than £100m in assets found 147 funds that incurred transaction costs higher than their advertised fee. Investment funds that aim to make investors money in all market conditions, known as “absolute return” funds, were among those that incurred the highest charges.

These included the £ 225m Artemis US Absolute Return fund, which incurred costs of 1.64pc on top of its 0.92pc headline fee.

Tracker funds, often praised for their low charges, also passed on transaction costs that were far in excess of their advertised fees.

Trading fees incurred by the £680m iShares Mid Cap UK Equity Index fund reached 0.67pc, four times its 0.17pc ongoing charge, while the £1.6bn HSBC FTSE 250 Index fund’s 0.36pc transaction fees were three times its 0.12pc headline cost. Fahad Hassan of Albemarle Street Partners, a wealth manager, said the jump in costs was also the result of investors pouring more money into funds attempting to profit from a market recovery after the March 2020 crash.

“As managers put new cash to work, the costs they incurred increased. The most popular funds were ones that invested in smaller and more expensive-to-trade stocks, which is why their costs rose the most,” he said.

Ryan Hughes of AJ Bell said that while costs had increased, trading more in tough markets was necessary to protect portfolios from poor performance.

“Fund managers had to navigate markets by selling high- risk companies, moving into safer stocks and cutting shares that stopped paying dividends,” he said.

A spokesman for HSBC said the FTSE 250 Index fund had “met its objective of offering value to investors” and that transaction costs were “published publicly”. Artemis said high trading activity was a feature of the US Absolute Return fund and that this increased in the pandemic.