Transaction costs fall ahead of FCA report publication

UK active managers have reduced their transaction costs by a fifth over the last three years, research published ahead of the FCA’s release of its final report into the asset management sector shows.

Transaction costs in UK actively managed funds have fallen 20 per cent since 2014, a period when portfolio turnover has only dropped from 59 per cent to 52 per cent, according to independent fund research company, Fitz Partners.

The research company says that transaction fees have decreased gradually from 0.25 per cent to 0.20 per cent.

The FCA’s final report of their asset management market study is due to be published on 28th June, potentially requiring asset managers to include transaction fees in their quoted Ongoing Charge Figure (OCF). The OCF has become a widely used and principal fee criteria in fund selection.

Fitz Partners estimates that on average, active funds included in The IA UK All Companies sector would see their OCFs increased by 0.25 per cent, pushing many quoted OCFs over the 1 per cent mark for “clean” classes offered to the retail market.

Currently, 77 per cent of active funds (clean class) in the UK All Companies sector show OCFs under 1 per cent, which some investors in the UK might now consider as a ceiling when it comes to acceptable fund charges. With the addition of transaction fees to OCFs, Fitz Partners says only 28 per cent of active funds in this sector would remain below a total fee ceiling of 1 per cent. Under market pressures, if asset managers feel they have to keep their OCFs unchanged, the cost to them would represent on average a cut of 30 per cent in their management fee revenues.

Fitz Partners chief executive Hugues Gillibert says: “We have seen a gradual disconnect between transaction fees and levels of portfolio turnover. A 20 per cent drop in transaction fees over three years, while portfolio turnover has remained relatively unchanged, is a sign of further tightening of fund costs. Although these charges are not usually disclosed to investors, they would have an impact on overall fund performance and are monitored internally by asset managers.

“When it comes to fund size, the impact on transaction fees is very real and as we see transaction fees gradually decreasing over the years, we also observe a further downward trend as funds AUM increase.”