Charging on

By DAILY MAIL REPORTER
Updated:

 

OVER the coming weeks, investment firms will pull no punches in attempting to persuade savers to commit cash to stock market Isas. Here, we ask whether firms can justify their management charges.

TOP fund managers are charging huge fees on poor performing funds, reducing investors' chances of making up losses on severely depleted savings.

Our research shows that Britain's biggest and most popular funds are still taking substantial fees despite losing savers money or, in the best cases, making only very modest returns.

In 1999 the FTSE 100 peaked at 6,930.2, helped by star-performing technology stocks. At that time investors rarely worried about how much they paid in fees because fund managers were making them money.

But now the FTSE has crashed to 3,945.6, a fall of 43%. With the outlook for the new year looking grim, how much you pay an expert to make you money will come under the spotlight.

But to see the real impact of fees, you have to wade through near impenetrable jargon buried in the small print. What you are looking for is the 'reduction in yield'.

In plain English, this means how much in total charges - including all hidden extras - gets knocked off your annual return.

Research from financial adviser Chartwell Investment Management shows how fees can hit your yearly return. Savers in the UK's biggest retail fund, Invesco Perpetual's High Income, would see their gain reduced by 2.1% in charges a year. So, for example, if you were lucky enough to have made £50 on a £1,000 investment in a year, you would see only £29 of this.

The fees on Jupiter's Income Trust are worse; you would get only £25 thanks to fees of 2.5%, while Gartmore's European Select Opportunities charges 2.4%.

These are expensive compared with some index tracker funds, which would hand you back over £44.

Fees on this fund reduce your gain by just 0.6%. But the reality is that most funds have lost money this year. So you would lose perhaps £20 to £25 from your £1,000 on top of any stock market falls.

Patrick Connolly, of Chartwell, says: 'Lots of funds do not merit the charges being levied on them and as a result they should come down. Quite simply, it's difficult to justify any charges of more than 1% a year.'

Of course, focusing solely on total fees payable would be a mistake because performance is vital to your investment reaching Premier League status or plummeting without a trace into the lower leagues.

But over the past three years, out of the ten biggest funds, only two corporate bond funds - from Scottish Widows and M&G - managed to avoid the red faces by just beating the humble savings account.

Putting money into a simple Nationwide Building Society InvestDirect savings account with no management fees would have beaten the other funds in our table.

People opting for the safety of the savings account and spurning the skills of top fund managers would have pocketed £1,141 before tax.

• CLAUDIA BAZZONI decided to start saving for her retirement by investing in two stocks and shares Individual Savings Accounts (ISAs) with Fidelity Investments.

Miss Bazzoni, 32, who works for a health authority in Cardiff, saved £1,000 into each of Fidelity's American and European funds in 1999. She also regularly saves £50 a month into both funds.

She plans to save into the funds for the next 25 years so is not as worried about the effect of charges in the short term. Miss Bazzoni, originally from Rome, says: 'I think saving into a deposit account gives a lower return than investing in the stock market over the long term. I know it's riskier, but I'm prepared to save for the next couple of decades, and hopefully my money with Fidelity will grow.'

&;149; Effect of charges and expenses based on investment yield of 7% over 10 years

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