The Norwegian Consumer Council has announced a court battle on behalf of 137,000 small investors of the DNB Norge mutual fund. Over a ten-year period the customers have lost NOK 750 million by paying excessive fees for management of their savings.

The Norwegian Consumer Council has now sent a third-party notice to DNB through the Mageli law firm. The mutual fund has not hunted for winning stocks: The fund has basically been guided by the index on the stock exchange. The fund is offered and priced, in its prospectus and articles of association, as an actively managed fund:

– …when data over a long period indicate a low degree of active management, the customer has not received the service he has paid for, writes professor Petter Bjerksund and associate professor Trond Døskeland at (NHH) in an analysis of the fund, commissioned by the Norwegian Consumer Council.

In a report last winter the Financial Supervisory Authority of Norway also said that the fund took overly high fees and delivered too low returns. The yield was more in line with the average on the stock exchange. This is what is called a “closet” index fund.

Class action

Customers who have demanded compensation from the bank after having paid too much in management fees have been refused.

– If customers have paid too much for a service, they must get their money back,  says the Norwegian Consumer Council, who are now taking the case to court on behalf of the fund’s small investors.

A final decision has not been made on whether the claim will be submitted as a class action on behalf of all the customers, or through one or more test cases.

The claim can be expanded

However, investigations conducted under the auspices of the Norwegian Consumer Council provide good grounds for asserting that the funds Avanse Norge (I), Avanse Norge (II) and DNB Norge (I) have also been managed in the same or almost the same way as DNB Norge. These three funds have also been merged into DNB Norge. DNB is being asked to respond to some questions about these funds – and a proviso has been included in the third-party notice that the Norwegian Consumer Council may also submit claims relating to management fees charged to these shareholders.

From 2005 until the spring of 2015, the fund charged shareholders in DNB Norge 1.8 percent and 2 percent of invested capital per year – for active management of their savings.

– With highly paid fund managers I do expect an active team of managers on my side – where they select winning stocks, while they doggedly try to beat the reference index. For that reason these funds should get out of the closet, present themselves as an index fund when that’s what they are – and lower the fees to customers even more, says Randi Flesland.

The cases relating to the banks’ sale of structured savings products concerned fewer customers and extremely large disputed amounts, while for the “closet’ index funds the dispute is about small amounts for a large number of investors. For the individual fund customers it does not appear that important there and then.

– But over a few years’ saving the difference can be quite noticeable, even if you don’t have all the money in the world saved in the fund, she says.

Becoming a common form of savings

The Norwegian Consumer Council also sees this case in a wider context: Investing in funds is becoming our most common form of savings, as many people are now switching from defined-benefit pensions to defined-contribution pensions – and to a larger degree we will be financing our pensions ourselves. “And today many people are losing money on bank deposits due to extremely low interest on deposits. Funds have also become an alternative to bank savings,” says Flesland. But because the difference in costs is so great, customers must be able to make informed choices between funds that actively select winners on the stock market and those that simply follow the index on the stock exchange.

Facts

Ordinary funds are managed actively by managers who try to select the best securities for the customers’ benefit. To get a manager to do that, you pay an annual fee, about 2 percent of the invested amount.

In principle a computer can manage an index fund. The task of these funds is to copy the average of the stock exchange (the index). The costs for such funds in Norway are less than 0.4 percent of the invested amount per year.

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