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Exasperated of Exeter: we address transactions cost disclosure

10th June 2022

I have to return to the exasperating issue of open-ended fund cost disclosures. Our ACD (Maitland Institutional Services – who, I hasten to add, we have an excellent relationship with) calculates all the various cost measures that the regulator requires us to disclose. You may know that I am leading a campaign (along with a few others) to encourage a more transparent and fairer calculation methodology for ongoing charge figures (OCFs). But we must also not forget about transaction costs. Currently, transactions costs are disclosed separately to the OCF and investors add these to the OCF to arrive at a “total cost of investing” figure.

We are currently in a situation where fund managers are asked to present performance net of all costs. This is absolutely correct. When one looks at a factsheet, one should look at the performance of a fund and know that is the actual performance were one to be invested in the fund. However, fund managers are also asked to present costs. Arguably they have already done so, as the performance shown is net of ALL costs. Wouldn’t it make more sense to show performance before costs, then show the costs incurred in generating that performance? The current situation risks confusing investors and risks investors double-counting costs.

But let’s park this issue. If fund managers are being asked to quote costs, everyone should be absolutely sure that these costs are correctly defined, applied consistently and calculated in the same way by all funds. Unfortunately, this is clearly not the case. You will know I have a huge issue with the way the OCF is currently calculated (as does almost every stakeholder in the industry) and we are trying to do something about it in the right way. This is ongoing. But I have now had the chance to have a closer look at transaction cost calculation methodology and my blood is boiling over. Several clients have queried us on this.

For us, a transaction cost is simple to define: it is the cost we incur as a result of our decision to buy or sell a security that results in a reduction in the net asset value of the fund. When we buy or sell an investment trust, we incur broker commission and (on purchases) we incur stamp duty. In addition, there are tiny fixed costs of dealing (e.g. the PTM levy). These are transactions costs

However it appears that every ACD has a different way of disclosing transactions costs. Indeed, some funds have negative transactions costs. How? Some ACDs allow a purchase below the prevailing mid-price (of a listed security) or a sale above the mid-price to be subtracted from the transaction cost. For us, this is nonsense. That is part of the investment return. A transaction cost is simply an unavoidable frictional cost when one deals. It has to be positive by definition. In addition, when we look through at other funds’ disclosures, they don’t have a mystical additional amount they have to add on to these frictional costs as we are doing.

And so, when investors look at cost disclosures on factsheets, they are looking at OCFs and transaction costs that carry almost no useful information. If these costs are ill-defined and not calculated universally, how on earth is this serving investors?

Once again, we encourage investors to focus on the only thing that matters: performance net of all costs. This information is already displayed on our factsheets and others’ and is impossible to manipulate without resorting to fraud. However, the cost figures on our factsheets bare little relation to the costs they are purported to be describing. The ridiculous situation today is that we believe that if we were to display gross performance and then subtract all the costs we are currently made to disclose, this would be less that the actual net performance of our funds!!! This is absurd and something has to be done about it. Once again, please focus on performance net of all costs through a market cycle. The current cost disclosure regime tells you less than nothing about value for money.

Ben Conway – Head of Fund Management

Ben Conway

For professional advisers only. This financial promotion is issued by Hawksmoor Fund Managers which is a trading name of Hawksmoor Investment Management (“Hawksmoor”). Hawksmoor is authorised and regulated by the Financial Conduct Authority. Hawksmoor’s registered office is 2nd Floor Stratus House, Emperor Way, Exeter Business Park, Exeter, Devon EX1 3QS. Company Number: 6307442. This document does not constitute an offer or invitation to any person, nor should its content be interpreted as investment or tax advice for which you should consult your financial adviser and/or accountant. The information and opinions it contains have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, but no representation is made as to their accuracy, completeness or correctness. Any opinion expressed in this document, whether in general or both on the performance of individual securities and in a wider economic context, represents the views of Hawksmoor at the time of preparation and may be subject to change. Past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you originally invested. FPC345.

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