The hidden costs of investment
We were interested in the recent analysis produced by Tribe Impact Capital which highlighted that in the past year UK charities have paid £686 million in investment management fees. We think the figure is more like £1bn, based on Charity Commission data.
Of course, we are told to look at the performance of investments after all costs, as it is the net return on investments that really matters. To a large extent this is true and given the net annualised returns of many charities in the last five years has been a healthy 7.1%* well ahead of CPI +4% at 5.8%, does it matter what the costs are? We think it does.
The Charity Commission data shows that it costs charities 14% to generate their income. Investments are at the expensive end of this. An investment fee of 1% fee represents 20% of what you are usually given to spend. If the investment community is correct in assuming future returns are going to be lower, say 3%, then your investment costs rise to 25%, a much higher figure than for income generation in general. Nor do weak managers charge less; no one would choose them if they did, so market forces don’t apply either.
The Investment Association in the UK gave pooled funds an exemption on disclosing fuller information on the total costs until the end of 2021. In a post-Brexit UK, there is discussion within HM Treasury that this exemption may be extended for a further five years. As a recent PwC report outlines, the investment management industry is becoming less profitable, but it doesn’t mean fees are going down. High pay and increased cost of regulation makes it difficult for firms to deliver their services at reduced rates, although cost efficiencies and technology should help to offset some of this. However, the shining good news is that the new CAIF funds for charities are cheaper than alternatives because they do not have to charge VAT on their fees.
If there is confusion on investment costs between market practitioners and their regulators, there will certainly be perplexity for charity trustees. If you would like a greater understanding of your charity’s true cost of earning its income, Yoke is on hand to help.
*Asset Risk Consultants Steady Growth Index, estimate as at 31 December 2020. FE Analytics