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Comparing Returns from Managed Funds
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# 1
TommyTortoise
Old 09-03-2012, 9:40 PM
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Question Comparing Returns from Managed Funds

Hi,
I have pension and other savings to invest, and have been given details of a moderate risk (ethical) discretionary managed portfolio run by a large company in Bristol. This gave the following annual returns (net of all charges) from 2007 to 2011: 2.9%, -8.5%, 12.5%, 11.7%, -3.5%. Over the 5 year period the annual compound return was 2.7%, with volatility of about 6.8%. The total annual charges are high. Can anyone advise on whether this is still a good return, in spite of high charges, or where I can go to find comparable data on returns? It doesn't seem straightforward (to me!), so I'd be grateful for any thoughts...
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# 2
dunstonh
Old 09-03-2012, 10:11 PM
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Without knowing what assets they are using and where it sits on a risk profile to compare against a suitable benchmark it is not really possible to say.
I am a Financial Adviser. Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from a Financial Adviser local to you.
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# 3
TommyTortoise
Old 10-03-2012, 8:12 AM
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Thanks for replying – I hadn't expected anything back so quickly!
It's moderate risk, 2nd up from cautious in a range of 4, which they try to keep in fairly tight volatility bands. Volatility % over the 5 years was Cautious 4.2, Moderate 6.8, Intermediate 9.5 and Adventurous 10.8. They told me that the best benchmark to compare with was the FTSE APCIMS Balanced TR (1.5% TER). This gave return figures from 2007 to 2011 of 4.1%, -18.7%, 15.1%, 10.8%, -1.3% and annual compound return over the 5 year period was 1.27% (volatility 13.1%). So the Moderate portfolio did out perform it overall but only because it suffered a lot less in 2008. I don't really know what the benchmark means – is it simply an average of a whole range of similar portfolios?
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# 4
TommyTortoise
Old 10-03-2012, 8:18 AM
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Oh, and they spread across a whole range of asset classes, mainly UK equity, some Japan & far east equity, international, other, property, government bonds, corporate bonds and a some cash.
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# 5
Totton
Old 10-03-2012, 9:43 AM
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Hi,
For comparing performance of funds you can get into a right old mess imho. Often the fund will benchmark itself against a mix of indices or as in your case the FTSE APCIMS which is quite useful for comparing against similar asset class mixes.

One other way of looking at this though is to start from what you want out of it, for example do you want 4% income or are you just trying to beat the FTSE All Share or as in my own case, keep ahead of inflation.

My own case sees me looking for Growth tinged with a bit of income, not because I want the income just now but because I think the income requirement helps focus the fund manager! So, I go for a mix of growth and income holdings, primarily Investment Trusts but also at various times ETF's and funds.

i set out each year to beat inflation which I add to my capital sum to give me a desired outcome by year end. If inflation is running at 4% then I'll add 4% to my objective, if inflation rises or falls then I bear that in mind but generally stick to my target to which I measure my portfolio performance. The essence is to keep it simple and easy to understand.

At various times of the year I will measure my portfolio performance against the Jupiter Fund of Funds Balanced and Growth offerings, I use these as a simple guide to that 'year point' as I think the Jupiter fund of funds offerings are amongst the best out there, I'd certainly take a look at those and compare them against the 'large company in Bristol' as the Merlin team have been at it a long time. Having said that, I would only use a Fund of Funds holding if my portfolio was too small to hold its own constituents or if I did not have the time nor inclination to monitor my own portfolio, that sometimes happens when I'm starting a new job etc.

I wouldn't get too hung up on benchmarks though, such things are often used to justify poor performance and say such things as "1st in Sector" or "1st quartile performance" rather than "Sorry but we lost you money this year".

If going the fund of funds route, I would suggest comparing your suggested fund against similar offerings from other companies such as Jupiter, Thames River etc.

If it's not a f-o-f approach but something akin to the HL Master Portfolios, then that's likely to work out cheaper than a fund of funds holding, looking at their medium risk portfolio they are all solid holdings but perhaps you may find it worthwhile reading 'Smarter Investing' by Tim Hale and taking a look at cheaper alternatives such as tracker funds, they aren't for me but if I were short of time and couldn't put together my own portfolio, then for a long term holding such as a pension you will be paying a lot less in annual fees if you were able to get similar portfolio performance out of something such as a Vanguard Life Strategy fund.

HTH,
Mickey
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# 6
TommyTortoise
Old 10-03-2012, 10:19 AM
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Thank you Mickey, that's given me a lot of food for thought and leads to follow. Its quite a lot of money involved so I don't want to take the decision too quickly. The company (Towry in fact) have given us good (and expensive) general financial advice, but of course have directed us to their managed funds, so it was not at all impartial in that respect. They do have a lot of clients funds under management, and they tell me that very few then move their investments elsewhere, but I need to back that up with independent information. I have already contacted H-L by phone and email but they haven't got back to me yet.
Thanks again for taking so much time to reply - very helpful.
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# 7
Totton
Old 10-03-2012, 10:35 AM
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As an aside, we used to deal via a stockbroker, they apparently operated along the lines of 'if you had 50,000 or less then it was managed funds, if more then they recommended UK equities plus Investment Trusts for foreign holdings'. We did leave their service after they ignored our concerns about Asian holdings which subsequently crashed, put money into another share at +7 a pop which later became worth <1p and then told us to put 50k into zeros shortly before they crashed, thankfully we got out after the 'zero' advice and before investing further. Previously they were an excellent firm but they got took over and things went to pot. Since that time we have used various fund platforms but now stick to HL whom have given us the best service to date.

For a substantial sum of money then it is very important imho to take account of good financial advice from a recommended IFA, I'd be prepared to pay an advice fee even if I then went my own route for portfolio management. Certainly for a large amount of money you need to take account of performance and costs as these can seriously damage your wealth in the long term. (Read the Tim Hale book)

You can use the free Morningstar portfolio service to create a portfolio (or 5) and benchmark that against various indices, this gives you a very easy to use 'quick-look' as to how your investments are doing on any day you want to take a look.

Regards,
Mickey

Last edited by Totton; 10-03-2012 at 10:41 AM.
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# 8
fairleads
Old 10-03-2012, 10:52 AM
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Quote:
Originally Posted by dunstonh View Post
Without knowing what assets they are using and where it sits on a risk profile to compare against a suitable benchmark it is not really possible to say.
Yes it is possible to say. A 2.7% return is c**p.
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# 9
TommyTortoise
Old 10-03-2012, 11:26 AM
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Mickey, thanks again for that.
Good point about the costs – I suppose their answer is that it doesn't matter as long as the net performance is good, but they'll have to consistently do that bit better than everyone else, which is a lot to ask.
I've already looked at the Jupiter Merlin Balanced portfolio – the pdf shows year on year % growth figures but I'm not sure if that is net of all (or some) of the charges. It shows -3.8%, -10.4%, 20.2%, 13.6% and 0.6% for 2007 – 2011. I wonder if there's a standard they all have to stick to? - some of the benchmarks say “1.5% TER”, total expense ratio. Does anyone know?
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# 10
Totton
Old 10-03-2012, 12:22 PM
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Fund performance figures would be TER and include any dividends that may have been paid. TER does not take into account things such as portfolio turnover costs when buying/selling equities & bonds etc, therefore when buying a fund or Investment Trust my normal practice is to find out what the PTR amount is. If you take account of the PTR with regard to the fund size, then you can get a better view of the true cost of the fund.

This can be an area where IT's gain over OEICS (not always though), for example let's assume that an OEIC charges 1.6% play has a PTR of 60% on 500k. The fund manager also runs a similar Investment Trust that charges 1.2% with a PTR of 25% on 300k of equity. Clearly the IT will be much cheaper than the OEIC which should translate to better performance. Examples include IP Income versus Edinburgh IT and a few others.

It is important to be aware of costs but not exclusively so, if a fund charges 2.5% and and has a 3yr average of 15% then you would prefer that over a fund charging 1.5% with a 3 yr average of just 5%. All this stuff sounds complicated but is easily worked out with a cheap calculator whilst enjoying a cup of tea :-)

A key point here is that raised by dunstonh at the start, you need to view all of this with strong reference to your risk profile. Tim Hale gives you a good source for getting an assessment of your risk profile.

HTH,
Mickey
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# 11
TommyTortoise
Old 10-03-2012, 4:07 PM
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Just back from a decent cycle ride. Nothing like it for clearing the head. I owe you several electronic beers - my faith in helpful human nature has increased by 25% (net of charges)! For now, I will start with the very sensible cup-of-tea suggestion.
Cheers!
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# 12
Honkytom
Old 14-11-2012, 7:40 AM
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Quote:
Originally Posted by Totton View Post
Fund performance figures would be TER and include any dividends that may have been paid.
Hi excuse my ignorance - I'm new to investing and struggling to understand the impact of costs/fees on returns/performance. Does what you say above mean that fund performance figures quoted on sites like Trustnet, Morningstar, Citywire etc are NET of TER.

eg Passive Tracker Fund X 5y performance annualised = 3.6% TER = 0.3%

Active Managed Fund Y 5yr performance annualised = 4.2% TER = 1.95%

My question is - Should I compare 4.2% with 3.6% or 2.25% (4.2-1.95) with 3.3% (3.6-0.3). Essentially am I comparing apples with apples when I look at performance and return figures?

Hope this makes sense!

Tom
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# 13
Linton
Old 14-11-2012, 9:15 AM
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Quote:
Originally Posted by Honkytom View Post
Hi excuse my ignorance - I'm new to investing and struggling to understand the impact of costs/fees on returns/performance. Does what you say above mean that fund performance figures quoted on sites like Trustnet, Morningstar, Citywire etc are NET of TER.

eg Passive Tracker Fund X 5y performance annualised = 3.6% TER = 0.3%

Active Managed Fund Y 5yr performance annualised = 4.2% TER = 1.95%

My question is - Should I compare 4.2% with 3.6% or 2.25% (4.2-1.95) with 3.3% (3.6-0.3). Essentially am I comparing apples with apples when I look at performance and return figures?

Hope this makes sense!

Tom
Published fund performance is after any charges. So if it says 4.2% return, that is what you get.
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# 14
Rollinghome
Old 14-11-2012, 11:17 AM
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Quote:
Originally Posted by Linton View Post
Published fund performance is after any charges. So if it says 4.2% return, that is what you get.
To avoid confusion, quoted returns are normally on a "bid to bid" basis and include any payable trail commission. So depending on what, how, and where you buy, then the return you actually get could be either more or less.

The bid price is the price the fund managers buy encashed units back at and the offer price is what they sell at. Trail commission is included in the annual charge and paid each year to the intermediary.

For example, if you invest in a way so as to pay both an initial charge and trail commission then you'll get less than the quoted returns. If you buy without paying any initial charge or spread and get some or all of the trail commission rebated, such as from CavendishOnline, then you should get more than the quoted return.

Depending on the time period and fund there could be quite a difference.

On just a few funds, including some index trackers, there is neither an initial charge nor trail commission payable so what you see is what you get.

Last edited by Rollinghome; 14-11-2012 at 11:37 AM.
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# 15
Linton
Old 14-11-2012, 11:45 AM
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Quote:
Originally Posted by Rollinghome View Post
To avoid confusion, quoted returns are normally on a "bid to bid" basis and include any payable trail commission. So depending on what, how, and where you buy, then the return you actually get could be either more or less.

The bid price is the price the fund managers buy unit at and the offer price is what they sell at. Trail commission is included in the annual charge and paid each year to the intermediary.

For example, if you invest in a way so as to pay both an initial charge and trail commission then you'll get less than the quoted returns. If you buy without paying any initial charge or spread and get some or all of the trail commission rebated, such as from CavendishOnline, then you should get more than the quoted return.

Depending on the time period and fund there could be quite a difference.

On just a few funds, including some index trackers, there is neither an initial charge nor trail commission payable so what you see is what you get.

All true, but a second level of detail. Most funds have one dealing price, not separate buy/sell prices. The +- on the quoted return is effectively your paying or not paying for a service beyond the actual fund itself. In some circumstances you may pay extra fees to an online broker or IFA for a cheap tracker for the same reason. This lack of transparency should disappear shortly.

The basic point remains that when comparing funds you dont subtract the TER from the published returns.
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# 16
Rollinghome
Old 14-11-2012, 12:14 PM
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Quote:
Originally Posted by Linton View Post
Most funds have one dealing price, not separate buy/sell prices.
Most, but not all, unit trusts have two prices. Most OEICs, but not all, have one price.

The difference between the two prices will include initial sales commission payable to intermediaries, the cost to the fund of buying or selling the underlying assets, and other factors.
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# 17
Linton
Old 14-11-2012, 1:23 PM
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Quote:
Originally Posted by Rollinghome View Post
Most, but not all, unit trusts have two prices. Most OEICs, but not all, have one price.

The difference between the two prices will include initial sales commission payable to intermediaries, the cost to the fund of buying or selling the underlying assets, and other factors.
Most funds, 80% from a random sample from trustnet, are single priced. But yes you do need to take account of the spread with two price funds.
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# 18
Rollinghome
Old 14-11-2012, 6:24 PM
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Quote:
Originally Posted by Linton View Post
Most funds, 80% from a random sample from trustnet, are single priced. But yes you do need to take account of the spread with two price funds.
Something like 99% of unit trusts use dual-pricing and probably 95% or more of OEICs have a single price.

But I don't think guestimates of percentages help much. What's important is the actual funds you hold.

For the purpose of making comparisons between funds you need to take into account all costs including initial charges, additional spreads, any dilution levy and all available rebates and should be aware that the figures shown on Trustnet don't take any of those factors into account.

You should also be aware that when a discount broker discounts the entire initial charge that doesn't mean that there'll be no spread and the spread won't necessarily be constant.
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