Comparing apples with apples

What is the real performance of an investment portfolio? Is it the overall growth in the value of the invested assets, or the actual cash that is delivered to the charity that it can then use to further its purposes?

As Quilter Cheviot’s head of charities William Reid highlighted in the preceding article, opinions differ on the correct answer. Certainly, however, the measure that really matters to charities and the beneficiaries of their work is the value ultimately available to further the cause.

“All performance should be quoted net of fees,” says Charles Mesquita, senior director of charities at Stanhope Consulting. “This is because as an investor you want to know what has been achieved after costs, not what has been achieved before charges were taken.”

However, quoting performance net of fees – while common – is not universally practiced. Indeed, the variety of approaches to disclosing investment management charges can make like-for-like comparisons between managers difficult.


Experts (and not just investment managers) caution against making cost the principal determining factor behind how or with whom charities choose to invest.

When it comes to fees, it is a question of value rather than cost. And value is necessarily relative to performance, service, and the charges offered across the various investment managers servicing charities.

“We do feel investors are often overly concerned about fees without considering the services they require,” says Matt Lonsdale, head of business development at ARC Consulting. “For example, if an investor wants a personal service from an investment manager they will pay a higher fee than someone who wants no service and wishes to invest in a single passive fund.”

And, encouragingly, evidence suggests that by and large fees have been falling over the past decade. Implementation of the Retail Distribution Review recommendations has contributed, along with the growth of platforms and greater awareness among investors.

In any case, the cost of management services remains a live issue across the investment community. Cost-conscious charity boards arguably have more reason than most to be mindful of what they are charged for the management of their assets.

Mesquita says the impact of investment management costs is even greater in the current environment, characterised by low growth and low returns.

“Trustees therefore need to be cost aware – i.e. know what they’re being charged – although investment decisions should not be driven by price alone.”

Of course, there are legal and regulatory imperatives too. According to the Charity Commission’s guidance (CC14), trustees are legally required to clearly understand what they are charged for management services and be satisfied that these charges represent value for money.

The commission recommends trustees “request an outline of all the fees that may apply to a portfolio and ensure there are no unexpected fees”.

Costs the regulator says charities are typically exposed to include management fees, commissions on transactions, management charges for pooled funds, administrative charges, performance fees, bank interest deductions, operating fees, custody fees, and third party fees.

So, a fair variety of charges that charities need to be aware of.

Transparency, consistency

Transparency of investment management costs is widely considered to have improved over the past decade, a welcome progression Mesquita attributes to client demand and helped along by regulation.

Lonsdale agrees that the industry has lifted its game in terms of transparency, but there remains “some way to go”.

“In our experience investment managers work very hard to be open with their clients,” he says. “There are a number of ways of presenting the information, so the difficulty is getting the same information from all providers, and having a process for making a meaningful comparison.”

So if charities are seeking to establish exactly what they will be charged by various managers, they need to ensure they are asking for, or being provided, the same information.

Popular measures include the Total Expense Ratio (TER) or the newer Ongoing Charges Figure (OCF), which from 2012 replaced the TER as the required charge disclosure measure for Ucits funds governed by EU legislation.

The OCF includes management fees, registration fees and other administrative costs. However, unlike the TER, it does not include performance fees.

Further muddying the waters, Mesquita says, is that there is no precise industry standard for calculating the OCF or TER, with “wide scope for interpretation” within the FCA guidelines.

“Our advice to trustees is to make sure their investment reports include the charges – both fees and TER or OCF – both as a percentage and in terms of pounds,” Mesquita says. “All too often, trustees focus on fees at appointment and then forget what they are being charged. Cost should be one of the factors are taken into consideration when reviewing your investment manager.”

It is here that an ‘apples with apples’ comparison becomes so important, to ensure that trustees are not only getting a comprehensive picture of the costs levied for their services but also the relative value various managers offered.

Although most managers have similar charging structures, costs vary widely depending on how assets are invested and in particular the number of different players involved in managing the various parts of the portfolio.

Mesquita points out that exposure to some asset classes, such as hedge funds and private equity investments, will be more expensive than allocations to ‘vanilla’ assets like equities and bonds. Sub-contracting services to third party funds can result drive up overall costs.

“The key for trustees is to be clear about what is being charged and by whom.”

    Share Story:

Recent Stories

Charity Times Awards 2023

How is the food and agricultural crisis affecting charity investment portfolios?
Charity Times editor, Lauren Weymouth, is joined by Jeneiv Shah, portfolio manager at Sarasin & Partners to discuss how the current pressures placed on agriculture and the wider food system is affecting charity investment portfolios.