For investors, a spat over investment charges obscures some good news.
Charges matter -- and most savvy investors understand that they should take slippery concepts such as funds' quoted annual management charges with a large shovelful of salt.
Instead, for a better grip on the charges that they'll pay, they should focus on the total expense ratio (TER), the calculation of which is prescribed by the Financial Services Authority.
And even then, of course, the TER doesn't include all the charges that a fund or investment trust investor winds up paying -- transaction costs, for instance, show up in the Portfolio Turnover Ratio. The impact of performance fees further muddies the waters.
Squabble
All of which serves as handy background in order to understand a juicy little spat that has broken out regarding a move by investment trust collective body the Association of Investment Companies (AIC) to abandon the use of TERs.
Instead, the AIC plans to quote something called an 'ongoing charge', and has published a methodology for how it proposes that it members should calculate these.
But the move has backfired. "Smoke and mirrors," charge critics. Why replace a figure that everybody understands with one that they don't? Why exclude performance fees? What is the AIC trying to hide?
And, unusually for such an august body, the AIC's director general, Ian Sayers, has responded in a strongly worded blog.
Strongly worded? Well, here's a taste: "Well, to be blunt, you're wrong," he tells the AIC's critics. "It's a shame, but that's the way it is."
AIC: 1, critics: 0
Having looked at the issue and picked up the phone to chat to Mr Sayers, I think he's right.
In short, far from slating the AIC, canny investors -- and certain elements of the financial press -- should be applauding them.
How so? Let's look at the facts.
Here's looking at you, KIID
As I wrote back in August, new regulations are imposing Key Investor Information Documents (KIIDs) on the investment fund industry. And, if you're an investor with funds on one of the popular fund supermarket investment platforms, you've probably seen the impact of KIIDs already, as they're being phased in right now.
The basic idea? A KIID is standard, pre-defined document, laid down by regulators, that makes sure that all investors see important information about the products in which they are investing -- important information that includes charges.
But critically, not charges in the precise form of TERs. Instead, if you look at a KIID, you'll see the term "ongoing charges", which is, of course, precisely the term that's been used by the AIC.
And that's exactly the point, stressed the AIC's Mr Sayers.
Like-for-like
"As an industry, investment trusts aren't yet subject to KIID rules," he told me. "But open-ended funds are -- and if charges aren't consistent across the two, it's difficult to make like-for-like comparisons."
And by moving early to embrace ongoing charges, instead of continuing to use TERs, he reckons that more investors will see that investment trusts offer the better deal.
What's more, the whole issue of performance fees is a red herring, he points out. The methodology for calculating the ongoing charges used in KIIDs has been precisely laid down by regulators in Europe, and the AIC's methodology mirrors this.
Change it, in short, and you lose the ability to make like-for-like comparisons -- which is the whole point.
And for those investors wanting to see the impact of performance fees, the AIC does publish this -- but not as part of the ongoing charge.
Goodbye TER all that
So is this the end of the TER? Will we all have to get used to talking about 'ongoing charges'?
It's hard to say. Certainly, popular platforms such as Hargreaves Lansdown (LSE: HL) are using the term 'TER' fairly interchangeably with 'ongoing charge' -- as they're perfectly entitled to, of course, outside the strictly regulated confined of a KIID.
What's more, points out Mr Sayers, in practice the two terms are more or less interchangeable. There are differences, but they are relatively minor, concerning things such as valuation points and asset measurement.
And the big story -- which seems to have been overlooked -- is that KIIDs and the AIC's new methodology makes it possible to compare every fund on sale with every investment trust listed on the market.
Before, this wasn't possible. And now it is -- which has to be good news.
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> Malcolm holds shares in none of the companies mentioned in this article. The Motley Fool owns shares in Hargreaves Lansdown.
