New paper urges full transparency from fund managers
27 May 2014 London
Image: Shutterstock
The Pensions Institute at Cass Business School has called for asset managers to reveal the full costs of their fund management business.
Investor returns are being damaged by hidden costs that are at least as big as the visible costs in actively managed funds, according to a report by the institute.
Research cited in the paper suggests that concealed costs, such as bid-ask spreads and transaction costs in underlying funds, can make up to 85 percent of a fund’s total transaction costs. The remainder is taken up by visible costs such as commissions, taxes and fees.
A staggered approach could be taken in the lead up to the full disclosure of all transaction costs, according to the paper.
Director of the Pensions Institute, Professor David Blake, said: “No good reasons have been put forward for why all the costs of investment management should not be fully disclosed. They are after all genuine costs borne by the investors.”
“There is little point in requiring transparency where the reported measure for ‘costs’ does not include all of the costs, or in the short-term, as many costs as could currently be reported on an efficient basis.”
Costs could be reported in the form of a ‘rate of cost’, which could be deducted from the gross rate of return to give a net rate of return, and as a monetary amount, which could be compared with the monetary value of the investor’s portfolio.
The paper concludes that, in the initial stage, investment managers should be required to report all visible cash costs involving commissions, taxes, fees, custodial charges and acquisitions costs, together with the hidden cash costs of bid ask spreads, transaction costs underlying funds and undisclosed revenue.
“All these indirect costs relate to the efficiency of the investment management process and all good investment managers should have an estimate of their size,” said Blake.
Investor returns are being damaged by hidden costs that are at least as big as the visible costs in actively managed funds, according to a report by the institute.
Research cited in the paper suggests that concealed costs, such as bid-ask spreads and transaction costs in underlying funds, can make up to 85 percent of a fund’s total transaction costs. The remainder is taken up by visible costs such as commissions, taxes and fees.
A staggered approach could be taken in the lead up to the full disclosure of all transaction costs, according to the paper.
Director of the Pensions Institute, Professor David Blake, said: “No good reasons have been put forward for why all the costs of investment management should not be fully disclosed. They are after all genuine costs borne by the investors.”
“There is little point in requiring transparency where the reported measure for ‘costs’ does not include all of the costs, or in the short-term, as many costs as could currently be reported on an efficient basis.”
Costs could be reported in the form of a ‘rate of cost’, which could be deducted from the gross rate of return to give a net rate of return, and as a monetary amount, which could be compared with the monetary value of the investor’s portfolio.
The paper concludes that, in the initial stage, investment managers should be required to report all visible cash costs involving commissions, taxes, fees, custodial charges and acquisitions costs, together with the hidden cash costs of bid ask spreads, transaction costs underlying funds and undisclosed revenue.
“All these indirect costs relate to the efficiency of the investment management process and all good investment managers should have an estimate of their size,” said Blake.
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