Investments 'lose 40% to fund manager fees'

THE UK's biggest investment funds are pocketing up to £40 in charges for every £100 invested in them regardless of performance, new figures show.

Investors hold billions in UK funds, but their chances of beating the market are being hit by charges that erode their returns by up to 40 per cent, according to research by DMP Financial. The figures produced for The Scotsman underline the extent to which the effect of charges stands out during periods of low growth. The difficulty for investors is exacerbated by industry standards used to measure investment charges that DMP described as misleading.

It cited the "reduction in yield" (RIY) figure used by fund firms to give the amount that investors can expect to get in return after charges, which it claimed was widely misunderstood. Under Financial Services Authority (FSA) rules, the RIY assumes that investments will grow by 6 per cent a year and then shows what the investor will get after charges have been deducted. However DMP claimed the RIY figure in most fund small print misleads investors because it gives the return left over after charges have been taken from the 6 per cent, rather than the actual amount being deducted.

Matthew Morris, director of DMP Financial, said fund management firms take advantage of the investor perception that they are only paying a couple of per cent in charges. "The reality is these charges are eating into returns so heavily, it's almost not worth making the investment in the first place," he said.

And the difference can be significant over the long term. DMP's analysis found that the return on the average equity fund is reduced by 37 per cent by charges, based on a 6 per cent gross return. It singled out the 266 million Gartmore Multi-Manager Balanced fund, which has turned 10,000 invested a decade ago into 13,849 before charges. Once the firm has stripped charges out, however, investors are left with a profit of just 690. Similarly, the same investment in the Insight Diversified Dynamic Return fund would now be worth 11,525 before charges. Take them out and investors are left with a fund worth just 9,180, less than they put in a decade ago.

"It is incredibly difficult for fund managers to beat the market when they are taking 40 per cent of a typical return away in charges," said Morris. "Therefore it is likely that on the average fund managers cannot produce above-market returns. Consequently, investors may well be taking additional risks in using some funds with no possibility of above-market returns."

The research is published as Terry Smith, chief executive of brokers Tullett Prebon, prepares to launch Fundsmith, a low-fee asset management firm.Smith estimated that if legendary investor Warren Buffett had levied the 2 per cent annual management fees and 20 per cent performance fees typically charged by hedge funds, he would have made more than ten times as much as those whose money he was investing.