Richard Butcher explains why the Cost Transparency Initiative is important, but could be lost in translation without a comparative.
Topics: cost transparency
I started my career at a time when the only paper emerging from a computer’s printer had pale green lines across it and perforations down the side, it folded at A3 intervals to form neat orderly piles that would gradually brown as they sat on the edge of your desk.
It’s the mental image of this stuff that comes to mind every time I think about investment transaction costs. Line after line of computer generated data detailing the up to, we think, 46 costs that could be incurred on each and every trade your fund manager makes. Terabytes of data – albeit more probably shared electronically these days.
First published in Pension Funds Online, 09 June 2017
The asset management industry is not used to having the spotlight shone on it, however it has come as a result of the debate on costs and charges. Donny Hay looks at the importance of transparency when dealing with costs.
In her January 2017 article titled "Understanding the transaction cost debate" my colleague Alison Bostock asked how DC trustees and Investment Governance Committees (IGCs) can meet their duty to assess whether transaction costs are value for money.
In my blog I described where and when pension investment costs can occur. In this blog, the third in the mini series, I set out what costs can occur “below the line”.
Firstly, a few things to remember from the first blog. The “line” is where the unit price is calculated. Costs that are below the line are implicit in the unit price (i.e. they are deducted BEFORE the unit price is calculated and so they are invisible to the consumer) and will not be contractually specific. Also, costs have both quantum and duration – different amounts at different times.
In my blog "The investment costs map: where costs can occur in the investment process" I described where and when pension investment costs can occur. In this blog, the second in the mini series, I will set out what costs can occur “above the line”.
Tim Harford, in his book The Under Cover Economist, makes the point that it is very difficult to out-perform the market over the long term, and concludes his argument by writing: “we should gently invest in a wide variety of shares, with no expectation of making a killing – we should diversify, keep charges low and avoid trying to be too clever”.
Good advice, although, in one respect at least, difficult to follow. We can all agree that investment costs should be low (although they should be low and optimal, as opposed to low for the sake of it) but how can we be certain they are when they are so opaque?