Rules that came into force across the EU this month with Mifid II are designed to help make sure investors get a fair deal by disclosing all of the costs of investing. Investors need transparency, because costs and charges matter a lot in investing. They can take a substantial proportion out of total returns, which are the ultimate lens for judging the value of any investment.
A lack of common practices in applying the rules across the industry is making like-for-like comparability difficult. Uneven quality of data and differences in cost estimates has meant investors are sifting through potentially misleading information, essentially comparing apples and oranges. Without accuracy and consistency, the industry has struggled to deliver transparency that is simple and meaningful. Asset managers need more and better guidance from regulators on how to measure transaction costs properly so that disclosures are consistent across funds, allowing investors to compare.
What matters to investors at the end of the day is performance net of costs — that is, once all the costs and charges are paid, how has the investment performed? Is the fund delivering risk-adjusted returns in line with its stated investment strategy and objectives? Are the costs of the fund justified by the level of expected return above the benchmark that the manager has or hasn’t delivered? It’s important that we not lose focus on this as the most meaningful and relevant metric. Investors picking among different funds that have different objectives and different costs need to be.
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