Retail investors face higher costs and more risk when investing in fixed income funds, according to the latest report from researcher Morningstar.
In its review of fixed income funds, the research firm found that the annual fee for wholesale fixed interest funds was 0.68 per cent compared with retail funds which charged more than double at 1.45 per cent.
"Given the returns generated in this asset class, we think retail investors are getting a poor deal," the report said.
While Morningstar acknowledged that retail distribution means added costs for fund managers, higher fees would also eat into extra returns generated by these funds.
Performance fees have also "started to sneak into this area" with the move "akin to daylight robbery", according to the report.
Of the 30 fixed income strategies researched by the firm, four had already charged performance fees.
"Morningstar has no problem with performance fees, but only when the ongoing fee is less than the peer average," Morningstar research analyst Christopher Douglas said.
Morningstar also found high-yield products were pushed into the retail sector, driven in part by fees.
The report warned that many of these investors may not fully understand the high risks involved in such strategies.
"Income is a defensive asset class, yet many high-yielding funds have come unstuck since the credit crunch," the report noted.
