The True Cost of Fund Management... Total annual fund charges are expressed as the Fitzrovia Total Expense Ratio (TER). The Fitzrovia TER represents the drag on fund performance caused by all annual operating costs (including administration/share registration, trustee/custody, audit and legal fees), notjust the basic annual management charge.  In other words, the Fitzrovia TER is the annual percentage reduction in investor returns that would result from largely fixed operating costs if markets were to remain flat and the fund's portfolio were to be held and not traded during a period. The formula used to calculate the TER highlights that it is calculated as a proportion of the same exact average net assets as the annual management charge, so the TER is sound regardless of the length of accounting period. Selecting Investment Funds: Why Costs Are Important Pressure is building for greater disclosure and transparency of investment products. Fitzrovia International has consistently argued the case for this in recent years and the importance of making fuller and fairer information available to individual investors and their advisers hasreceived some heavyweight support. A fund's Total Expense Ratio is a statutory requirement in the US$ 7 trillion American mutual funds industry, where the Securities & Exchange Commission "recommends that investors assess a fund's costs, which can have an enormous impact on returns…"   Fitzrovia argues that information on costs and charges is incomplete, since most investors can only only compare funds by the stated figure for the annual management charge. While the UK 's Key Features Document provides more detailed information on charges, this is only provided at the outset - these can change over the life of an investment. Comparable information that is easy to understand is vital across all markets. Fitzrovia, however, does not claim that high charges automatically mean poor performance, and investors may take the view that they are prepared to pay higher comparable charges in the hope that these will be offset by significantly better performance. But as ongoing positive returns are the end goal for investors, advisers and managers alike, the fairest means for assessing the impact of all annual charges on fund performance should be in everyone's interests. Be aware that the additional charges that are included in a TER do not contribute to a fund's investment management. It is worth treating the phrase "you pay for what you get" with caution when looking at TERs.   Charges need not be the determining factor for selecting a fund, but it is currently not easy enough to accurately compare this important factor in the fund selction and monitoring process. For many investors too much attention is paid to the initial or front-end charge, which may range around the 5% mark. But it is the continual drip, drip of the subsequent annual charges that can cause the most damage to the value of the investor's capital, especially over the longer term.   A mutual or collective fund (such as Unit Trusts, OEICs or Investment Trusts in the UK , and the European and offshore versions such as SICAVs and FCPs) should be considered as a long term investment. Consequently the impact of total annual operating costs, expressed as a TER by Fitzrovia, constitutes a very real drag on investment performance. A glance at the attached graph illustrates how this can be as dramatic as it is painful. Drag Effect of TER on Fund Performance Assuming 7% growth per annum   Initial Investment After 5 years After 10 years After 15 years After 20 years No Annual Charges £1m £1,402,551 £1,967,151 £2,759,031 £3,869,684 0.5% Charges £1m £1,370,086 £1,877,137 £2,571,841 £3,523,645 1% Charges £1m £1,338,225 £1,790,847 £2,396,558 £3,207,135 1.5% Charges £1m £1,306,960 £1,708,144 £2,232,476 £2,917,757 2% Charges £1m £1,276,281 £1,628,894 £2,078,928 £2,653,297 2.5% Charges £1m £1,246,181 £1,552,969 £1,935,282 £2,411,714 3% Charges £1m £1,216,653 £1,480,244 £1,800,944 £2,191,123 3.5% Charges £1m £1,187,686 £1,410,599 £1,675,349 £1,675,349 4% Charges £1m £1,187,686 £1,410,599 £1,675,349 £1,989,789   Research Offers Insights into Trading Costs A quarter of all actively managed equity funds in the UK have portfolio turnover levels above 96% a year, latest research from Fitzrovia International reveals in its second analysis of portfolio turnover levels for Unit Trusts and OEICs.   Taking conservative assumptions (* see Notes to Editors), this means that this group of most actively traded funds have estimated trading costs of at least 0.96% each year, compared with 0.55% for the median fund. Looking only at funds investing in the UK , the most actively traded funds have estimated trading costs of at least 1.14% each year, compared to the median of 0.72%. While funds that invest solely in the UK generally have lower portfolio turnover levels (the highest 25% of these funds have turnover levels above 76.2%), the associated trading costs are higher due to the impact of stamp duty. At the other end of the scale, a quarter of all actively managed equity funds have portfolio turnover levels below 32.8%, with estimated trading costs of up to 0.33% each year. For funds investing in the UK the turnover level falls to 25.3%, but estimated trading costs are up to 0.38% each year. "Portfolio turnover can be a crucial part of establishing whether a fund is doing 'what it says on the label'," comments Ed Moisson of Fitzrovia International.   "For example, high portfolio turnover for a fund claiming to be very actively managed is an indication that it is being managed in the anticipated way. On the other hand, a fund with higher turnover, but with a more conservative stated management style should prompt the fund manager to explain the reasons for such regular changes to the portfolio." While pressure is increasing in the US for greater disclosure of fund fees and portfolio turnover levels, in the UK neither portfolio turnover nor Total Expense Ratios (TERs) are required to be disclosed. Do TERs correlate with Fund Performance Investment Philosophy Tour: The Effects of Inflation