The funds that justify their premium fee
Don’t reject expensive funds out of hand – they can turn out to be the best performers, writes James Connington
The fees that fund managers charge are coming under ever-greater scrutiny, as many have been accused of levying extortionate prices for doing little more than tracking the market. Low charges alone, however, are not an effective way to identify a fund capable of delivering outperformance.
Research from the City watchdog found that when investors were warned about the impact of fees on returns they tended to opt for cheaper funds. But many of the best-performing UK funds have annual charges that are considered expensive – 1pc or more.
Among the 238 funds in the UK “all companies” sector that have a five-year track record, the average ongoing charge figure (OCF) of the 10 top-performing funds over five years is 0.99pc a year, according to research from fund shop Chelsea Financial Services. This does not include transaction costs incurred when a fund trades shares.
The top performer, Old Mutual UK Dynamic, has an OCF of 1.07pc and annual transaction costs of 0.52pc. The fund, which focuses on small and medium-sized companies, returned 130pc over five years after all fees and costs, compared with 69pc for its benchmark index, the FTSE 250. Since its launch in 2009 it has returned 414pc, against 265pc for the index.
The second-best performer, the Conbrio Sanford Deland UK Buffettology fund, has an OCF of 1.28pc plus transaction costs of 0.22pc. It has returned 121pc over five years, compared with 44pc for the FTSE All Share index.
Of the 60 top-performing funds in the UK all companies sector over five years, only three have an OCF of less than 0.7pc: Montanaro UK Income, the ishares Mid Cap UK Equity Index tracker fund and the HSBC FTSE 250 tracker fund. They returned 71pc, 58pc and 57pc.
Of the sector’s 50 top-performing funds over 10 years, only five have an annual charge of 0.7pc or less, according to data from FE Analytics.
Active funds with higher charges are also prevalent among the bottom performers, however: 34 of the 60 worst-performing UK all companies funds over five years have an OCF of more than 1pc.
The two most expensive funds, Delmore Growth & Income and