LONDON - Fund managers in the UK have rushed to discredit research showing that a new type of pooled fund structure which managers are increasingly using costs private investors far more than any other type of fund.

The fund in question is the open-ended investment company and it is growing in popularity with managers because it is easier to sell in Europe where investors are familiar with the structure. However, a study by fund analyst Fitzrovia International of London concluded that investors would be better off putting their money into a unit trust where the average total expense ratio, a figure which measures all the expenses of a fund, such as legal and audit costs and not just the annual management fee, is 1.48 percent for the year ended June 30.

The equivalent total expense ratio for open ended investment companies was 1.72 per cent, according to Fitzrovia.

The research is a blow for the growing number of fund managers, such as Fidelity Investments of Kent which have converted all their existing funds to the new structure. Besides Fidelity Investments, Standard Life of Edinburgh, Threadneedle Group of London, Global Asset Management of Bermuda, Morgan Stanley of London and Rothschild Asset Management of London have all launched open-ended investment company funds.

Open-ended investment companies, which have existed since 1997, were created when retail fund managers in the UK complained that the unit trust, the best selling type of pooled fund in the UK, was difficult to sell on the European mainland because investors did not understand its structure.

But Fitzrovia's revelation on costs has alarmed managers who sell open-ended investment company funds. They fear that it could deter investors from investing in the funds.

Fitzrovia has not been challenged about the accuracy of its figures but it has been accused of presenting the facts in a misleading way. Fitzrovia has calculated average open-ended investment company total expense ratios for some of these managers. Standard Life's funds' total expense ratio stands at 1.54 per cent, Threadneedle's at 1.63 per cent and Fidelity's at 1.65 per cent. Rothschild Asset Management's total expense ratio was 1.98 per cent.

But the Association of Unit Trusts and Investment Funds, which represents most fund managers, is fighting back. It argues that Fitzrovia was wrong to suggest that investors would be better off investing in a unit trust because there is no reason an open-ended investment company fund should be more expensive than a unit trust. The differences in costs can be explained by differences in the funds which Fitzrovia studied, the association said.

For example, large funds are likely to have lower total expense ratios than small funds, that funds investing in overseas markets will have higher total expense ratios than UK funds and that new funds will show higher costs than old funds, the association said. For example, fixed costs such as audit fees will mean a higher total expense ratio the smaller the fund.

"So an old, large fund should be slightly cheaper than a new small fund and a UK income fund cheaper than a Latin American fund," said Alan Ainsworth, the association's chairman.

Total expense ratios are also affected by whether the fund manager has a higher or lower annual charge, the association said. Therefore the level of the total expense ratio is not at all related to whether the fund is an open-ended investment company or a unit trust, it said.

Whoever is right, the argument between Fitzrovia and the fund managers has served to put the costs of managing funds under the spotlight. While all expenses which can be charged to a fund have to be disclosed to investors in documents relating to the fund, investors in all types of funds are not usually presented with a total expense ratio figure.

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