Investment Funds – A Note on Clean Share Classes
Investing in a fund? How picking the right share class can improve your return
Traditionally, when investors placed money into investment funds, the fund manager typically allowed for the payment of a trail commission to an intermediary in the fund charges. This resulted in funds charging annual management charges (AMCs) of 1.5% or higher. These charges are paid within the fund and are not charged directly to the investor. However, the level of charges is a material consideration as it will clearly have an impact on the longer term return for the investor.
As a result of the pressure from clients and regulators for greater transparency, and also because of competition from low cost passive alternatives, the trend internationally in recent years has to been to bring AMCs lower. Recent years have seen the emergence of ‘Clean’ share classes with no inbuilt charge for distribution. These clean share classes have materially lower Annual Management Charge (AMCs) and are clearly superior in terms of value for the investor.
However, it is important for clients to be aware that the traditional higher charge share classes are still widely available and are still more commonly sold to investors than the clean share classes. At Harvest, where possible we only recommend clean share classes for our clients, thus ensuring that they are getting the best value available in the market.
A survey of the funds on Harvest’s Recommended List of investments analysed the average AMCs on this list and calculated the impact on a €100,000 investment over a five year period as follows:
Share Class Traditional Clean
Average AMC 1.52% 0.57%
Value of €100k at year 5 €118,219 €124,032
(assume 5% p.a. headline growth before AMC)
As the table shows, the additional cost of the higher AMC on traditional share classes reduces the fund growth from 24% to 18% over a five year period, assuming 5% headline growth annually on the fund.
Clean share classes have the potential to benefit investors by removing opaque fund charging structures and can dramatically improve investor’s experience and their outcomes.
At Harvest we are happy to review our client’s existing investment portfolios to compare the existing cost of their funds to the clean share class. To arrange a review, contact your Client Manager or call us on 01 2375500/ email justask@harvestfinancial.ie.
