Investment fund charges explained – new legislation for 2018

From January 2018 MiFID 2 introduced a requirement for investment funds to publish an estimate based on the historic costs incurred. Now that these figures are available Lorica is able to provide them to customers.

What are transaction costs?

Transaction costs are the expenses incurred by funds in buying and selling stocks and shares. Although reported investment performance has always included these charges, new rules require them to be disclosed separately and aggregately with any other costs.

In the past Lorica has provided customers with the most accurate breakdown of costs available and will continue to do so. New disclosure rules for fund managers mean that transaction costs can now be shown as a separate item.

There are several different ways of expressing fund management charges. These include the Annual Management Charge (AMC), the Total Expense Ratio (TER) and the Ongoing Charges Figure (OCF).

Lorica previously quoted the OCF wherever it was available, or, if not, the TER [which includes the AMC] together with registration fees, custody fees and distribution costs charged by the funds.

The new disclosure rules for fund managers mean that we can now provide a further level of detail.

Does this mean that the Lorica Portfolios are now more expensive?

No. Transaction costs are not new and have always been included in investment performance. What has changed is that they will now be disclosed separately.

In the past Lorica has quoted investment returns net of all fund management charges and will continue to do so. The requirement for the fund managers we use to show transaction costs separately is part of a number of measures to make the asset management industry more transparent. This is something we welcome.

The new disclosure rules provide Lorica additional information to evaluate which are the best funds for our clients.

Where will I see the transaction costs?

Transaction costs will be shown on illustrations for ISAs and general investment accounts, such as personal portfolios.

Current legislation does not require transaction costs to be disclosed on pension or International Portfolio bond illustrations. However, with our quarterly recommendations Lorica will, from now on, include transaction charges, irrespective of the type of account within the information we provide to you.

Not everyone has chosen to provide this level of transparency and this does mean that the costs we quote to you in our quarterly fund updates may look higher than they do in illustrations from another provider.

What do the transaction costs mean for my portfolio?

When we evaluate potential investments we take into account all of the costs charged by or incurred by a fund. If we do not believe that costs are justified by expected investment performance, we will not recommend a fund as part of your portfolio.

However, simply comparing transaction costs may create a misleading impression.

• Transaction costs do not necessarily reduce returns. The net impact of dealing is the combination of the effectiveness of the manager’s investment decisions in improving returns and the associated costs of investment.
• Historic transaction costs are not always an effective indicator of the impact of future transaction costs on performance.
• Transaction costs for buying and selling investments due to other investors joining or leaving the fund may be recovered from those investors.
• Transaction costs vary from country to country.
• Transaction costs vary depending on the types of asset a fund invests in, for example, a fund that invests in property will very likely have higher transaction costs.
• Transaction costs are not predictable as they depend on the manager’s investment decisions.