Whilst most funds (your work based pension scheme, stocks and shares isa or junior ISA) have annual management charges (amc), small differences in the amc can have a significant impact on the value of your investment.
Before we consider which funds have higher charges and whether these are justified, let’s look at the difference higher charges can make.
Consider someone who invests £3,000 per year into a stocks and shares ISA for 20 years:
The graph below shows the impact over different terms with different excess charges. As expected, the longer the term, and the higher the excess charges, the greater the impact on your investment.
This is where it can get complicated. If you invest in a fund (ie a basket of shares run by a fund manager such as an insurance company or investment management company), then you will pay an annual management charge. This will often be made clear. But two other charges need to be taken into account:
Once charges reach a certain level, it becomes very difficult for an active manager to do better than the equivalent return on the index. Past performance tables show that not many active fund managers are able regularly to justify the extra fees incurred. Whilst some active managers do achieve this, trying to identify them in advance is very difficult, as many leading managers go on to underperform following a good period of performance.
Therefore, whilst we are not against active management, many investors might be better off with an index tracking approach (sometimes referred to as passive approach), where the annual returns broadly track the index returns of that investment class.