Fees: bigger the fund, harder they fall?

A confirmation of some good news, via the first chapter of Morningstar’s Global Investor Experience report. The research house notes that fund fees have tended to come down across different parts of the globe in the last two years, with price wars in the passive space continuing to drive down charges overall.

If not new this is certainly positive, and Morningstar also says that the introduction of fund value assessments in the UK has put further scrutiny on what investment managers are charging their end customers. But a finding elsewhere suggests that fees aren’t exactly moving uniformly downward, and that they may remain high in some unexpected places.

We tend to assume that when funds stand the test of time they can achieve certain economies of scale that are passed on to investors via fee cuts. By contrast we might accept that newer, smaller funds come with hefty fixed costs that feed into higher charges. But a recent AJ Bell analysis suggests life is more complicated than that.

AJ Bell has found quite the disparity between the average “young” active fund and more established counterparts. On average, a fund launched less than five years ago charges less than 0.8 per cent, while a fund which launched between 10 and 15 years ago typically charges 1.2 per cent. Speaking more broadly, AJ Bell notes that a fund with a track record of 10 years (or more) charges an average management charge of 1.38 per cent, well above the 0.93 per cent for offerings less than a decade old. That’s not an unsubstantial difference, and surprising to see in a world where value assessments push for economies of scale to be passed on by larger funds.

AJ Bell provides us with one generous interpretation, that good funds can charge a premium for their services, as well as the suggestion that some successful asset managers are simply sitting on their laurels and relying on investor inertia to keep charges higher. While returns after fees are really what matter most, it would be nice to see some of these economies of scale passed on where that isn't the case.

Yet, to my mind, there's another complication. From environmental, social and governance (ESG) portfolios to alternative asset classes, a good number of new funds come with a specialism that can command a premium for now. While the extra due diligence may justify higher fees in some cases, this could put a spanner in the works when it comes to the trend for newer funds to charge lower fees.

We've seen a similar trend in the exchange traded fund (ETF) space: while ESG products here don't tend to be enormously more expensive than their "vanilla" counterparts, some thematic funds carry chunky fees. Take the popular KraneShares CSI China Internet UCITS ETF (KWBP), which charges 0.75 per cent.

In some areas, such as thematics, it seems likely that fee pressure will kick in once we see more competition, and that can't come soon enough – although it looks less likely in the alternative assets space. For now, higher charges on any funds, old or new, may focus your mind even more closely on whether a particular fund is working well enough to justify its charges. In the absence of lower fees, that at least is a good discipline to have.