The contrarian investorHot under the collar

The FT's David Stevenson asks are investors getting a good deal from their investment funds?

Many moons ago I mentioned in this column my leisurely lunch one fine summer's day with Mr Ed Moisson from Lipper, discussing the costs involved with fund management.

The overall focus of our discussion was on the rising cost of fund management, the wonderful new fee structures being introduced and the even more worrying trends on the mainland in Europe. Ed clearly knows his TERs from his 'common-or-garden onion's and so I asked him to dig around in his database and examine how expenses are related back to performance.

Well Mr Moisson has indeed reported back and I have to say even a hardened cynic like me was astonished by his analysis.

First the obvious targets - fund of funds. It's absolutely no surprise to any of you that fund of fund unit trusts charge a bomb - they argue they're worth it and maybe they are. I actually think that a great absolute returns manager is worth their weight in gold among others but all I can say is there's a lot of gold going to be needed for the following funds - CF Miton Global Portfolio A 3.14% Inclusive TER, T Bailey Equity Income 3.14% and New Star Portfolio Investment - European A 3.04$. By inclusive, Ed means annual operating costs of the fund of funds as well as TERs of the underlying, with overtly institutional and non-retail funds excluded and data based on Spring 2009 analysis. By comparison, the lowest cost providers in this fund of fund sector consisted exclusively of Fidelity and 7IM where the Inclusive TER ranged between 1.48% and 1.61%.

But the particular focus of my ire is performance fees. I used to think these were rather a good idea because they linked the manager's interest to those of the investor but I now contend that these are in fact a rotten idea that should be killed immediately. I now accept the argument that they are encouraging fund managers to behave like errant trading desk investment bankers - "Yes, I'm paid an absolute fortune already but I want more".

Anyway Mr Moisson has run the numbers on performance fees AND TERs for both unit trusts and listed investment trusts and there are some real shockers. Top of the pops was the Virgin Climate Change fund with 4.47%. Fresh, innovative thinking with a difference from a brand we can all trust - I think not.

If all of these funds had doubled in value over the last year even I would accept that a juicy performance fee was acceptable but I think you know the truth of the matter!

Also I bet that all of these have very stringent criteria that extract a very heavy penaltyfor under-performance… or at least that's what the eternal optimist in me says.