IMA's Saunders: Why 'trading costs' campaign is misguided

Here's a New Year puzzle for you. Fund A has annual charges of 1.5%, and in addition incurs annual trading costs in its portfolio of 0.2%. Fund B also has charges of 1.5% a year, but its trading costs are 0.4% a year. Which is better value for money?

There's a group of people out there who want you to believe the answer is Fund A - after all, the costs are lower, so you must get a better return. Now here's another clue. Last year Fund A returned 1% less than the stock market index, while Fund B returned 1% more. In other words the extra 0.2% of trading costs resulted in a 2% extra return. In my book that would be pretty good value for money. These are illustrative examples. It would be wrong to argue that funds with higher trading costs always perform better. But the point is that they might. And you do not know unless you look. T...