A Total Expense Ratio (TER) represents the drag on company performance caused by all 

annual operating costs (including administration, custody, audit and legal fees), not just the 

basic management fee. 

 In other words, the TER is the annual percentage reduction in 

investor returns that would result from operating costs if markets were to remain flat and the 

fund’s portfolio were to be held and not traded during a period. More detail on the calculation 

of the TER is outlined later in this document 

The TERs shown on www.theaic.co.uk have been calculated by Lipper, in association with the 

AIC, and based on the information published in the audited (annual) financial statements and 

regular reported data such as the NAVs. 

The TER for each company is updated on an annual 

basis following the announcement of the final results. Varying year-end reporting dates 

necessitate that to ensure the cost comparisons are both relevant and timely the TER data on 

www.theaic.co.uk is updated on a quarterly basis (January, April July and October). 

The European Commission published its recommendations on some contents of the 

simplified prospectus (UCITS III - document 2004/384/EC) in April 2004, which included 

guidelines for TERs. 

These TER guidelines are based on similar principles to the approach 

Lipper have already established. One particular change in methodology is the inclusion of 

performance fees in the TER, where the simplified prospectus requires performance fees to 

be both included in the calculation of the TER and also shown separately, whereas historically 

Lipper has published the performance fee charged as a separate field of information. 

Although the requirements of the simplified prospectus do not apply to investment 

companies, the AIC recognise the desire for comparability across other types of collective 

investment vehicles (e.g. open-ended funds). 

The TERs published on www.theaic.co.uk are 

thus based on similar principles. On www.theaic.co.uk where a company has a performance 

fee charge, two TERs are published, including and excluding the performance fee. 

Additional 

details are also provided regarding any reconstruction costs incurred and whether there is a 

performance fee arrangement in place. 

In Lipper’s opinion the NAV TER is the most directly comparable ratio to “Lipper TERs” that 

are published in other publications for other types of collective investment vehicles. As well 

as calculating a range of NAV TERs, Lipper calculates additional TERs based on the Gross 

Asset Value and on the Market Value. For any queries, please e-mail 

lipperfitzrovia@reuters.com or visit www.lipperweb.com 

LIPPER TER CALCULATION 

The formula for the calculation of Lipper TERs shown is as follows: 

Total Annualised Net Operating Expenses 

Total Expense Ratio (NAV) % = 

Average NAV of company during period 

Underpinning this calculation are two key elements: 

a) Total Annualised Net Operating Expenses 

Underlying expenses are sourced from each company’s annual audited accounts. These are 

categorised into operating expenses and non-operating expenses. 

However, in broad terms the operating expenses are the costs that a company would have to 

pay even in the absence of any purchases and sales of shares, and if investment markets 

remained static for the whole period. 

They therefore include management fees, audit fees, 

directors’ remuneration, custody charges and any administration and marketing costs, but 

exclude capital gains and losses, and costs associated with share transactions. 

If a financial reporting period is less than a full year the operating expenses are annualised 

(multiplied by 365 and divided by the number of days in the period). 

b) Average Net Asset Value (NAV) during the period 

Wherever possible we calculate average net assets during the period using the month end net 

asset values, thereby providing an accurate estimate of the reduction in annual returns 

accounted for by a company’s operating charges. Some companies such as many venture 

capital trusts only calculate their net assets biannually. In this case, the average NAV is 

necessarily based on the average of the opening, half-year and closing values. 

It should be appreciated that the Net Asset Value is the underlying book value of the 

company’s assets. This does not correspond to the price at which investors may buy and sell 

shares in the company as this is calculated from the Market Value of the shares. The 

difference between these two valuation methods is known as the Discount or Premium. A 

Discount signifies that the Net Asset Value is higher than the Market Value and a Premium 

the reverse. Although investors cannot buy or sell their shares by reference to the NAV it is 

nevertheless an important valuation method because it indicates the investors’ net exposure 

to the market in which the company is invested. 

“Investment Company Charges” in association with the AIC 

© Lipper – updated October 2007 

DETAILED POLICIES REGARDING TER CALCULATIONS 

As with any preparation of statistics it is necessary to set out policies and assumptions, some 

of which require subjective judgment. These situations are outlined below for information: 

1) Annual Financial Statements 

Audited annual reports have been used for all calculations. Semi-annual reports, if available, 

contain an insufficient analysis of expenses to produce an accurate Lipper TER. 

2) Non-Operating Costs 

In several cases a companies breakdown of expenses will include items that Lipper do not 

consider to be operating expenses: these will have been excluded from the Total Operating 

Expenses figure and there will be a reconciliation difference between this and the total 

expenses shown in the financial statements. 

Company expense statements often include items that are excluded from the Lipper charging 

calculation for obvious reasons, such as dividend payments and capital items (unrealised 

losses on investments etc.) Other exclusions from calculations are as follows: 

a) Lipper excludes performance fees from the standard TER calculation and continue to 

believe that two separate figures are most relevant and useful for clients and investors. 

The following points outline in detail why a consolidated [TER + Performance Fee] figure 

on its own may well cause confusion: 

Annual operating expenses act as a drag each year on fund performance, and so if the TER 

is to be used as a guide to the ongoing drag, it is important for a single figure to exclude 

performance fees (with the latter then shown separately). In a combined figure one 

cannot see how much is a result of fund performance and how much is a result of largely 

fixed operating expenses. 

Performance fees are, by their very name, performance-related and so might not be 

payable in any given period. Nevertheless, clearly understandable information on 

performance fees – both their structure and what has been charged – is essential for the 

investment community. 

Two funds, with otherwise identical expenses, are likely to have different TERs if 

performance fees were included. 

Furthermore, the better performer could have a higher 

TER. This could also create a situation where the TER of a fund could look volatile over 

time, when, in fact, this merely reflects the fund’s performance, rather than its operating 

costs. Indeed the inclusion of performance fees in a TER could partly reflect wider market 

conditions over the accounting period. 

A TER can sometimes be lower than a fund’s total operating expenses, or even negative, if 

performance fees are included. This is explained as follows: performance fees must 

necessarily be accrued at each fund valuation point. The actual crystallisation (i.e. when it 

is fixed and recorded as a payment) of that performance fee might not happen for some 

time. Any subsequent downturn in a fund’s share price will result in reduced performance 

fee accruals at future valuation points. This could lead to a situation where, within a 

particular accounting period, there is actually a reduction in the accrued performance 

fees. 

The impact of performance fees in terms of a fund’s net assets, if the performance goals 

were achieved over an accounting period, can be expressed separately (and are expressed 

separately in Lipper research). However, the most useful and relevant performance fee 

figure for investors and others is not the performance fee that was achieved in any given 

period (in net assets), but the performance fee structure itself (together with the fund’s 

performance). 

b) bank and loan interest, because this is deemed to be an investment related capital 

expense rather than an operating expense. 

c) brokerage, which is treated as a capital item and not an operating expense by the 

majority of companies; 

d) currency profit/loss on the companies revenue bank account, the inclusion of which 

would either increase or decrease the genuine operating expenses figure. 

e) restructuring costs, such as expenses associated with the buy-back of shares/warrants, 

restructuring of debt, mergers and other types of restructuring which are considered to 

be capital items, are generally one-off and which would distort the Lipper TER, thus 

making comparisons between companies meaningless. 

3) Ordinary Shares and Other Share Classes 

Certain investment companies issue more than one share class to meet the needs of different 

types of investor; for example, those requiring either income or capital growth or to suit 

different risk profiles. These share classes generally have differing cost structures. 

Described below is the treatment of the main types of share class currently in issue: 

a) Preference shares and zero dividend preference shares 

No expenses are attributable to preference shares and they therefore always have a zero 

Lipper TER. 

Although preference shares often carry voting rights and are treated in the accounts as 

being shareholders funds, to all intents and purposes they are a form of long term 

financing. They are consequently treated as such in the Lipper TER calculation and are 

deducted at book value from total assets to arrive at the net assets figure attributable to 

ordinary shareholders. 

b) Split capital investment companies with income shares 

“Investment Company Charges” in association with the AIC 

© Lipper – updated October 2007 

Lipper has taken the decision not to calculate TERs for split capital investment companies 

as this could be misleading for investors. For example, the split between income and 

capital means that a TER could potentially be 0% or extraordinarily high. In addition, split 

capital investment companies TERs would not be comparable with any other company, or 

indeed any other type of collective investment vehicle. 

More specifically, the NAV in the balance sheet is not always representative of the fair NAV 

of the shares (for example Income shares may receive all of the income and yet carry a 

value in the accounts of their redemption price, which may be nominal). Unfortunately, the 

process of deciding whether or not the balance sheet value is fair is a subjective one. 

Whenever possible it is Lipper’s policy to avoid subjectivity. 

6) Convertible loan stock 

The issue of convertible loan stock (CULS) can have a material effect on the NAV of the 

ordinary shares. Where the share price has risen and the CULS may be exercised at a higher 

value than book value there is a clear liability that is not recorded in the balance sheet. To 

reflect this potentially material item the diluted NAV per share is used reflecting the NAV per 

share after the theoretical conversion of all of the CULS. 

7) Fees Charged to Capital Account 

As discussed previously, we do not include in our Lipper TER calculations capital items such 

as brokerage. The apportionment of operating expenses to capital is widespread throughout 

the investment company industry. To fairly calculate the Lipper TER in these cases we have 

“repatriated” such items for inclusion in our Lipper TER calculations. 

8) Short Accounting Periods 

Where companies have been launched part-way through an accounting period but the 

resulting reporting period is more than ninety days old, we have included charging structure 

data for reasons similar to those outlined in the first page of this section. 

9) Errors in Lipper TER Calculations 

With any analysis such as this, questions regarding the accuracy of the underlying data are 

inevitable. In general, notified “errors” have in fact been the result either of a different 

method of calculating net assets (such as simply using closing assets, which is inferior), or 

the result of a subjective judgment made by the questioner with which we do not ourselves 

agree. 

The majority of the remaining “errors” have been the results of a cry of “foul” from certain 

promoters, for example where it has been claimed that a high, all-encompassing figure 

termed “Other Expenses” in the financial statements has in fact included non-operating costs 

such as brokerage. While these cases are extremely infrequent, we are of the opinion that we 

can only work with the information that is provided within the financial statements, and that 

any investors conducting their own Lipper TER calculations on the basis of the companies 

report and accounts would reasonably only come to the same conclusions as ourselves. This 

often leads to greater disclosure in the accounts in future periods. 

“Investment Company Charges” in association with the AIC