What's Wrong With Britain's Fund Industry

Here at The Motley Fool, we've long argued that fund managers charge too much for an investment performance that can turn out to be decidedly indifferent.

Indeed, as I wrote a few weeks ago, 67% of fund managers undershoot their benchmark. Which is truly shocking.

But that doesn't stop them charging investors handsomely for the privilege of investing in their funds -- even if a low-cost tracker would have delivered a better performance at a lower cost.

And now wealth management firm SCM Private has entered the fray, launching a campaign for true and fair fund labelling.

What's wrong

A report just published by SCM makes some telling points -- although, if you're a regular reader of The Fool, you won't be too surprised by some of them.

• Out of 19 countries, the UK apparently has the fourth highest total charges for fund products.
• The UK lags far behind US and Europe on transparency of holdings and fees.
• 80% of investment funds that have changed their fees between 2001 and 2011 have increased them.
• Over two-thirds of the money invested in active funds within the UK's largest retail fund sector is invested in funds that have the same identical annual management fee.
• Just 19% of savers and investors know what they are being charged by investment managers.

It's damning stuff, in short, and an eloquent argument in favour of low-cost index trackers.

Changes

That said, it's also an eloquent argument in favour of reform. And in launching his true and fair campaign, reform is very much what SCM co-founder Alan Miller has in mind.

And Mr Miller, what's more, has more insight than most.

Formerly the chief investment officer and founding shareholder of New Star Asset Management from early 2001 until his departure in early 2007, he managed a number of portfolios at New Star including the New Star Investment Trust and the New Star UK Hedge Fund. Before that, he was at Jupiter Asset Management, and Gartmore.

So I picked up the phone to ask him what exactly he thought needed reforming.

The answers, in short, were surprising.

Transparency

To begin with, cost wasn't his prime concern.

The trouble is, he says, there's not enough clarity around what exactly managers are doing with the money that investors give them.

"American fund managers publish their entire portfolios online, once a quarter, and have been obliged to do so for almost a decade," he says. "Here in the UK, managers publish the information just once a year, when it is already out of date."

Costs

Charges, too, are opaque.

As we've said here on The Fool many times before, the total expense ratio is a better guide to costs than the annual management charge, but doesn't include every item of cost -- trading costs, for example, are excluded. Portfolio turnover rate adds to costs, too, and is also excluded from the total expense ratio calculation.

In Mr Miller's book, a single number -- a 'Total Cost of Investment' number -- would be a fairer and more transparent way of making cost information explicit.

What's more, he reckons this could be achieved.

Change the rulebook

What can be done? Mr Miller wastes no time in pointing the finger -- and it's not at the fund management industry.