With the right incentives and economies of scale, charges can be extremely low. For example the 2002 Annual Report of the Danish ATP pension scheme states that for the year:

"Pension activity costs were recorded at DKK 27 ( £ 2.18 ) for each member, while investment activity costs were DKK 16 per member."

In addition to pension schemes, investment trusts - closed-ended investment companies - can also have very low charges, such as Argo Investments in Australia:

"Our costs represent less than 0.2 % per annum of average assets at market value and there are no management fees. That’s 20 cents for every $100 managed.

Some of our competitors charge their investors management fees that are ten times our costs of administration. But then, they are owned by financial institutions whose major objective is to maximise the profit they make from the fund. The higher the management costs - the better for them - because the profitability of the manager depends upon it."

Argo has an impressive investment performance:

"a combination of dividend income and capital growth averaging 17.2 % compound per year for the 20 years to 30 September 2001, assuming reinvestment of all dividends and entitlements. This compares with 13.3 % for the All Ordinaries Accumulation Index."

2. The need to disclose portfolio turnover and the cost of dealing

The Sunday Times article says that the average annual management fee for an actively managed fund "has risen from 1.37 % to 1.38 % in the past 12 months." It adds:

"The 'true' cost is even higher. Annual fees do not include 'hidden' charges such as administration and legal fees."

Annual fees also do not include the cost of dealing in the underlying investments. These costs are not even included in the total expense ratio (TER). Dealing costs are a multiple of portfolio turnover because the more dealing the more costs. The FSA recently estimated dealing costs to be in the range 1.5 - 1.8 % of portfolio turnover. The recent Fitzrovia report Portfolio Turnover of UK Funds shows turnover up to 685 % per annum, with an average turnover 54 % for UK equity funds and 67 % for all the 1018 actively managed equity funds in the survey. The difference between 1.37 % and 1.38 % for the annual management fee in the Sunday Times article, is splitting hairs when dealing costs are being ignored.

The importance of undisclosed costs can be seen for example from the diagram in the consultation paper of the FSA Comparative Information for Financial Services (1999) (Annex 2). This shows unit trusts underperforming the market by 3.7 % per annum. "These averages were calculated over the 1987 to 1998 period for UK funds ... The sample of funds used includes all broad based equity funds in existence over the sample period ..." Only 1.2 % is due to the annual management charge. Discussing the difference 3.7 - 1.2 = 2.5 % , it comments:

"But some must be due to dealing costs or other costs which are not disclosed to investors." (paragraph 6.12)

The "other costs" are for example the "administration and legal fees" in the Sunday Times article. Surely the 2.5 % must be entirely caused by costs. The alternative is that the fund managers of unit trusts are systematically choosing poor performing investments.

Portfolio turnover has been increasing in general. The Oxford Research Associates (OXERA) report An Assessment of Soft Commission Arrangements and Bundled Brokerage Services in the UK (April 2003), says that on the London Stock Exchange:

"In value terms, turnover on both UK and international equity increased from £ 610 billion in 1990 to £ 5,581 billion in 2001, an average annual growth rate of 22 %." (paragraph 102)

Exchange the magazine of the London Stock Exchange, reports that turnover of UK shares increased from £ 760 billion in 1998 to £ 1,420 billion in 2002 ² even though the total market value (at end September) decreased from £ 1,220 to £ 1,105 billion.

The increase in portfolio turnover is causing an increase in dealing costs. OXERA reported that:

"Total (stockbroker) commission revenue increased by 18 % annually from £ 1.5 billion in 1992 and to £ 5.7 billion in 2000." (paragraph 103)

Dealing costs are outside the proposed 1 % cap on charges for stakeholder pensions and the new Sandler stakeholder products. Where there is an incentive to impose high charges, "a cap on charges" is inadequate as a method of restricting charges. The expression "charges are capped at 1 %" is misleading. If there is no incentive to impose high charges then "a cap on charges" is unnecessary.

The Sunday Times article concludes "you should consider a switch to a fund that offers better value". There is an enormous literature indicating that funds with low portfolio turnover tend to be better value than those with high portfolio turnover. The book Investments from Stanford University in the US, gives as an example the Altamira Equity Fund:

"In 1993, the fund had transaction costs of 2.22%, pushing the total costs to 4.59% as a percentage of assets in the fund. In 1994, transaction costs of 1.30% pushed total costs to 3.62%. 'It is clear that MERs do not tell the whole story,'"

MER the "Managment Expense Ratio" is the US equivalent of the TER.

"The MER does include the management fee paid to the mutual fund management company for its portfolio management expertise, plus the fund's operational expenses such as record keeping, custodial fees and audit costs."

But it does not tell the whole story.