Why don’t UK investment funds get cheaper as they grow?

Unlike investment funds in other countries, UK funds have been getting more expensive for investors as they have increased in size.  These apparent dis-economies of scale have shown up in the latest annual survey carried out by the sector’s own trade body, the Investment Management Association (IMA) and analysis from TCF Investment.  Despite the average fund size and total assets under management more than doubling over the last decade, the average Total Expense Ratios (TERs) on UK funds have increased by nearly 10%.

The IMA 2011 Survey – based on data up to December 2010 – showed that over the last 10 years, the average (mean) fund size has grown from £126.5m to £278.8m, while total assets have grown from £260bn to £590bn.

On the basis that the actual number of funds has been pretty much constant over this period, one would expect the costs per fund to go down as a percentage; there must be economies of scale as no more fund management resource is required no matter how big the funds are.

But data from Lipper FMI shows that average UK TERs over the same period had risen from 1.55% pa to 1.70%pa, an increase of nearly 10%.  Put another way, the IMA data means the average fee per fund going to the manager has gone from £1.96m to £4.74m over the last ten years.

Earlier research from TCF Investment (on Equity funds) shows that the fund fees in many countries reduce as funds grow in size – but not in the UK:

Median TER based on various fund sizes (%pa) source:  Morningstar, 2010

Fund Size	Below £50m	£50-£275m	£275-£700m	Over £700m
France	2.34	1.97	1.61	1.58
Germany	1.73	1.61	1.43	1.37
US	1.5	1.38	1.27	1.24
UK	1.77	1.66	1.65	1.67

Even though Germany has fewer large funds than the UK, managers are able to pass more of the benefits of scale onto investors than happens in this country.  On average a £700m fund in Germany charges its investors £2m per year less than its equivalent in the UK.

David Norman, CEO of TCF Investment said, “I cannot think of any other industry where buying more of a product does not lead to a lower price.  It would be very simple to address this issue by introducing a downwards sliding scale of fees based on fund size, just as we do at TCF Investment. ”

TCF Investment is committed to clarity and fairness in all its dealings and is actively campaigning for radical improvement in the behaviour of that part of the investment industry that would seem to have forgotten whose money it is they are investing.