By Maryum Malik Research by Investment Week's parent company City Financial Communications into TERs...
By Maryum Malik
Research by Investment Week's parent company City Financial Communications into TERs has found a far broader range between investment trusts than unit trusts.
The group has TER directories for both types of investment vehicles and based its conclusions upon a comparison of the two.
In all City Financial has analysed 770 equity unit trusts against 213 investment trusts (see tables one and two).
Despite the difference in numbers analysed, investment trusts displayed a number of similarities to unit trusts. Namely, that as the asset size increases, the TER consequently decreases as costs are smoothed down by economies of scale.
Investment trusts, however, display a much wider range of TERs than unit trusts. For example, looking at table one, the difference between the highest and lowest TER is 1.66% whereas the difference between the highest and lowest TER analysed for unit trusts comes in at only 0.36%.
This difference in TERs is due mainly to the fact that investment trusts have relatively low annual management (AMC) charges compared with unit trusts. Looking at tables one and two, annual management charges for investment trusts are less than 1% across all fund size ranges analysed whereas unit trust annual management charges in the equity unit trust sector analysed are on average 1.20%.
However, looking at the fee multipliers in the tables, the higher fee multipliers which prevail in investment trusts illustrate that much of the expenses seem to be carried elsewhere, such as higher administrative expenses, which fall into the calculations category known as other expenses.
This makes analysis of charges even more important because a higher percentage of charges are hidden in the report and accounts.
As the first two tables show, the fee multipliers on investment trusts are higher and more wide ranging for investment trusts. For example, fee multipliers for investment trusts (table one) range from between 1.97% and 2.84%, a 0.87% difference as opposed to unit trusts where fee multipliers range from 1.1% to 1.3%, displaying only a 0.2% difference.
A further possible explanation for lower annual management charges and higher fee multipliers for investment trusts is the inclusion of self managed funds that exist within this investment trust directory universe but not the unit trust directory universe.
Self managed trusts, such as Sun Alliance or Albany trust, do not have an annual management fee as such, hence most of the expenses fall into the other expenses category which has the effect of pushing up the fee multiplier. This also pushes down the average on investment trust annual management charges.
A further comparison of charges between investment trusts and unit trusts can be made by looking at individual funds. Tables three and four show examples of a breakdown of individual funds for both unit trusts and investments trust.
Again, City Financial has endeavoured to make the comparison as fair as possible by comparing investment trusts and unit trusts that have similar fund sizes and are in the same geographical sector.
The most striking difference here is that for funds below £20m unit trusts have lower TERs and hence are cheaper than investment trusts across all geographical sectors. However, as soon as a fund reaches £20m, investment trusts have lower TERs than unit trusts in the majority of cases.
Similarities appear between the two vehicles in that funds investing in emerging and Pacific regions tend to exhibit higher TERs than other geographical sectors.
Further evidence of similarities between the two vehicles show a tendency for managers investing in more unstable regions, such as the Pacific and emerging markets, to do so if the funds are large enough to handle the volatile markets in those areas.
Comparing the TERs of investment trusts with unit trusts is not strictly a like-for-like exercise, as they are very different investment vehicles, the former closed ended the latter not, making comparisons difficult.
Nevertheless, investment trusts and unit trusts are two of the main collective investment vehicles in the UK, particularly for the retail market, so comparisons between the two vehicles on issues such as performance and charges will inevitably be made.
City Financial has tried to do this in the fairest way possible by comparing both vehicles against a number of similar measures - fund type, fund size and geographical sector.
Figures used for unit trusts were taken from the unit trust and Oeic expense ratio directory 1999. City Financial made the comparison between equity unit trusts which most resembled the universe of investment trusts analysed.
The City Financial Communications TER directories for investment trusts and unit trusts are both available. For further details contact Maryum Malik on 020 74322369 or e-mail her at [email protected]
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