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Offshore Funds Are More Expensive Than UK Funds—Report
27 May 2005
The average annual management charge for offshore funds is almost the same as for UK-domiciled funds, but the total expense ratio is much higher for offshore funds, according to the latest research from Fitzrovia, a research consultancy. The research also estimated the annual charges made for UK unit trusts and Open Ended Investment Company (OEICs) in the UK The research is particularly pertinent, according to Fitzrovia, due to the anticipated rise in the demand for offshore funds after legislative changes expected to be introduced soon in the UK. The research found that the average management charge of an actively managed equity fund in mainstream sectors in the UK is 1.38 per cent, compared to offshore funds at 1.36 per cent. However, the average TER is noticeably lower for UK funds, at 1.52 per cent, compare with 1.75 per cent for offshore funds. The same analysis was carried out for actively managed bond funds. Here average management charges are shown to be significantly lower for offshore funds than for UK funds. While the gap between the UK and offshore narrows when TERs are compared, it is only with the straight mean average that UK funds have lower annual charges—the weighted average TER is lower for offshore funds than for the UK. Fitzrovia said that the UK has the highest proportion of its assets invested in equity funds, and as such it is “possible that charging levels for bond funds in the UK are set in relation to fund companies’ equity fund ranges.” The research consultancy added that when comparing UK and offshore annual charges, it is essential to use a TER measurement to “generate meaningful comparisons.” The report also analysed the annual charges for each unit trust and OEIC in the UK that has published a financial statement, which showed that the annual management charges for these funds reached £2,682.6 million ($4,886.9 million) and total annual operating charges reached £2,932.09 million. Fitzrovia said that the difference between the total annual operating charges and the management charges shows the level of non-management charges funds bear each year, which was £249.44 million. “In other words, UK fund investors paid nearly £250 million over the last year in annual fund charges beyond the generally quoted annual management charge,through reduced performance. This is one of the reasons why the industry’s moves to disclose TERs are so welcome,” said the Fitzrovia report. Total annual operating charges include non-management charges that are generally paid to third party service providers, such as administrators, trustees/custodians and auditors, and therefore do not add to fund management company revenues. Also, fees other than those paid to the fund company – such as trail commissions – will be paid out of the annual management charge, according to the research firm.