FTfm on total expense ratios in active management
In today’s FTfm, Pauline Skypala draws attention to the plight of individual investors that, unlike institutional investors, are unable to negotiate management fees with their fund managers and as such, need to understand exactly what it is they are paying for and why.
Pauline draws attention to Total Expense Ratios (TERs) as a means of estimating the ‘all in costs’ and asks for the opinion of Stuart Fowler. “The key is whether the activity of the manager offers value for money”.
Stuart points out that portfolio turnover (a measure of how frequently assets within a fund are bought and sold by the managers) has risen hugely over the past decade or so, but with trading costs reducing, the overall effect has been neutral. He goes on to say the average active manager underperforms the benchmark by the amount of the average TER. They would underperform by more if their trading activity did not add value.