Are you getting value from your funds?

Published: 27 April 2018

The Financial Conduct Authority (FCA) recently acknowledged that for many investors, “making informed investment decisions can be hard”1.

That’s one of the reasons that new rules, set out by the regulator in April following its study of the asset management market last year, included a new requirement for fund managers to assess their products for value for money.

Value for money can feel subjective, largely based on your own experience. The new assessments (which fund managers will have to do from September 2019) should help you to make more objective judgements. They must be made available annually, and will cover criteria including quality of service, performance, fund management costs and economies of scale.

But you don’t have to wait for the new rules to get a better handle on whether you are getting value from your current funds. It is already relatively easy to review the costs, objectives, performance and methods of different funds, and compare them to others of a similar kind.

How to check costs and objectives for your current funds

Most fund managers have to offer either a Key Investor Information Document (KIID) or a Key Information Document (KID), both of which provide important information about a fund and whether it might be right for you.

These are typically used when deciding where to invest, but they can be similarly helpful in working out if the funds you’re already in are still right for you and offering value for money.

The KIID and the KID will outline the fund’s investment goals, the main risks you might face by investing in it and how it has performed in recent years (or, in the case of a KID, how it might be expected to perform in future) however, remember that past performance and future returns are not guaranteed. Crucially, it will also give you its ongoing charges figure (OCF), which covers costs including administration, distribution and the fee for the actual investment management.

Remember, the higher the costs, the greater the potential impact on returns

While value is not just about cost, the impact of charges on investment returns ensures that it’s vital for you to understand what you are paying. Because what appears to be a small difference in charges can mount up to a big difference over the long term, with the effect of compounding taking a portion out of any potential returns.

The FCA’s Asset Management Market Study found that investors “might not pay sufficient attention to charges or understand their impact on investment returns”.

It added that this can cause harm in two ways: “directly by causing investors to hold poor value for money products, and indirectly through reducing competition between asset managers to lower charges over time” 2.

Its research found that a fund providing 6% growth and charging 1.5% a year would cost an investor who had invested £20,000 in it £12,789 more over a 20-year period than the same fund with a 0.3% a year charge3.

Looking at a lower initial investment of £10,000 in a fund that grows at a lower rate of 4% a year over 20 years, the impact of compounding over time can still be seen. Paying a 1% charge would see you get back £1,837 less compared to if your charge had been 0.5% instead4.

A review of your current portfolio needn’t take a lot of time

Keeping on top of the impact of charges is just one reason to get into the habit of reviewing your portfolio on a regular basis, if you don’t already.

It’s also the best way to help ensure you’re getting what you want from your investments, that you’re still in the right funds for your needs and objectives and you’re on the right track towards meeting your longer-term savings goals.

For funds available through Alliance Trust Savings, KIIDs (used for OEICs and Unit Trusts) and KIDs (used for Investment Trusts and Exchange Traded Funds) are easily accessible on our website or through your secure online account.

So, if you’ve got a bit of time to spare right now, why not make a start?

Important information

This is provided for general information only and takes no account of personal circumstances. It is not a recommendation to buy or sell. It is provided solely to support you in making your own investment decisions. If you have any doubts as to their suitability you should seek expert advice. Alliance Trust Savings does not give financial or investment advice.

Laws and tax rules may change in the future without notice.

Please be aware that the value of investments can fall as well as rise so you could get back less than you invest.

1FCA, Asset Management Market Study remedies and changes (PS18/8), April 2018 (page 5)
2FCA, Now you see it (Occasional Paper 32), April 2018 (page 3)
3FCA, Asset Management Market Study Terms of Reference, November 2015 (page 9)
4FCA, Now you see it (Occasional Paper 32), April 2018 (page 15)

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Alliance Trust Savings Limited is registered in Scotland No. SC 98767, registered office, PO Box 164, 8 West Marketgait, Dundee DD1 9YP; is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, firm reference number 116115. Alliance Trust Savings Limited gives no financial or investment advice. ‘Alliance Trust Savings’, ‘ATS’ and 'AT Savings' are all brand names of Alliance Trust Savings Limited together with the ‘Alliance Trust Savings’ logo are owned by and used with the permission of Alliance Trust PLC, the previous owner of Alliance Trust Savings Limited.