Sunday Times, August 24th, 2003

INVESTMENT firms have hiked their fees over the past year, even though investors have typically seen the value of their funds grow by just 1.1%.

The average annual fee for an actively managed equity fund has risen from 1.37% to 1.38% in the past 12 months, according to Fitzrovia International, a financial-research company. It means that investors are paying more than £321m extra a year.

Justin Modray of Bestinvest, a financial adviser, said: "Charges are going up so that investment companies can increase their revenues and profitability. This is a blow for investors who have already had to endure more than three years of poor stock-market returns."

The "true" cost is even higher. Annual management fees do not include "hidden" charges such as administration and legal fees. The total annual fees levied by fund managers are included in a measure called the total expense ratio (TER). The average TER has risen to 1.64% from 1.57% a year ago.

Annual fees can have a big impact on returns. Ed Moisson of Fitzrovia International said: "Annual charges drag on a fund's performance. A manager of a fund with higher annual charges has to perform better than one with lower charges just to keep pace."

If you invested £1,000 in an Isa and it grew by 6% a year, your investment would be worth about £1,532 after 10 years, assuming a TER of 1.64%. But it would be worth £1,708 if the fees were just 0.5% a year. Fund managers often justify their fees by claiming a link between charges and performance. But research carried out for The Sunday Times last week confirms that higher fees do not buy better funds.

Torquil Clark, an adviser, studied the relationship between charges and performance. It concluded that investors invariably pay over the odds for poorly performing unit trusts and Isas.

In many cases cheaper Isas, charging investors less than 1% a year, perform better than more expensive funds that often charge up to 6% upfront and have TERs of more than 2%.

Investors are therefore being urged to weigh up whether they are getting good value for money. If you are paying over the odds for poor returns, you should consider a switch to a fund that offers better value.