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  • FIRST POST
    • alewin
    • By alewin 13th Mar 17, 4:38 PM
    • 60Posts
    • 99Thanks
    alewin
    Funds that take charges from capital.
    • #1
    • 13th Mar 17, 4:38 PM
    Funds that take charges from capital. 13th Mar 17 at 4:38 PM
    When investing in a particular fund do you normally check where the fund charges are taken from, income or capital?

    With capital, it just seems discouraging when the number of units you have diminishes slightly, say every month. Used to have a stakeholder pension with Legal & General invested in the UK Recovery Fund for a year before I transferred out, and the number of units used to go down slightly every month, sold off to cover the fund charges. I know that this was more of a specialist fund that did not have much dividend income to probably cover the charges.
Page 1
    • bowlhead99
    • By bowlhead99 13th Mar 17, 6:17 PM
    • 6,886 Posts
    • 12,397 Thanks
    bowlhead99
    • #2
    • 13th Mar 17, 6:17 PM
    • #2
    • 13th Mar 17, 6:17 PM
    Short answer no, though I am generally investing in a tax free isa or pension environment and not really looking to withdraw income anyway. Long answer below...


    In a typical fund, the charging of expenses to capital and then distributing the relatively larger remaining "net income" stream can be useful for those investors who are specifically looking for larger amounts of ongoing dividends in preference to capital gains.

    This "charging fees/expenses to capital" could be done in various ways; either by literally snaffling some of your units (a bit archaic) or by simply billing the fund and then the fund has less capital retained after paying its bills so each unit is inherently less valuable. Both would effectively get you to the same place: you still own £x thousand pounds' worth of underlying investment assets.

    Having said that charging you by taking your units is a bit archaic... actually it is still used sometimes even on modern funds on DIY platforms. That's because on such platforms, the platform custody/admin fee charging has to be explicit (rather than having the platform be compensated by a kickback on the management fees that were charged directly to the fund). So in order for the platform to get paid - if you don't have any cash in your account, and you aren't generating any cash in your account by taking an income from the funds because you're using "accumulation" units - the platform's Ts&Cs might allow them to redeem some of your units and take the resulting cash in settlement of their fees.

    But ignoring the outright "snaffling of units" - if you take a fund or investment trust that is setting itself up and wondering where to charge its management fee in terms of against its income stream or against its capital position:

    - the fund will generally plan to pay out its net income over time (though it's more flexible for investment trusts than unit trusts or oeics)

    - if the fees are charged against income there is less to pay out as net "income" profits, and relatively more fund assets to reinvest.

    - if the fees are instead charged to capital the investors would get bigger ongoing dividend payouts (because the income stream hadn't suffered the fee) but instead the retained capital gains would be smaller (or capital losses larger) and there is less money left in the fund so the units are worth fewer pounds each.

    Charging fees to capital thus results in lower retained fund value per share, but investors have more income in their own hands, and can of course reinvest that, sticking the money right back in the fund (after paying appropriate taxes - if taxpayers and not using ISA/pension).

    If you are using accumulation units because you don't actually want the cashflow... and you are using an ISA or pension or have lots of dividend allowance and capital gains allowance so you don't give two hoots about tax treatment of what is technically a dividend being paid out and immediately reinvested... then it doesn't really matter to you at all.

    Imagine you put £100 in a fund. The fund grows by making £4 of dividend income from its investee companies, and £5 of realised and unrealized capital gains on the companies' values increasing. And then there is management fee cost of £1 for the year. By end of year your fund unit is worth £108.

    The fee would be charged to income or capital or to a mix of income or capital based on the fund's constitution. If it was to income there would be £3 of net income to distribute as dividends leaving £105 fund value. If it was to capital there would be a full £4 of dividend available for distribution leaving the unit worth £104.

    If you had accumulation units the divs would not be paid out, simply reinvested by the manager in more assets, so each fund unit would be worth £108 still, as you go into the next year. If you had distributing units then depending on the streaming of costs between the income and capital you would either have £4 divs plus a £104 unit or £3 divs plus a £105 unit. It's all the same value overall if you don't care about tax.

    In that scenario, If you had distributing units but wanted to reinvest, you could invest the £4 divs to buy a further 0.03846 units at £104 each, now holding a total 1.03846 units at £104 = £108 of invested value. Or you could invest the £3 divs to buy the units worth £105 each and end up with 1.02857 units = £108 of invested value going into the next year.

    So, as an ISA/ SIPP investor I often don't pay attention to how they take their fees ; I am just going to accumulate most of what I have for the long term anyway. If I get paid out divs I will be investing them back into the same, or different, funds anyway.
    Last edited by bowlhead99; 13-03-2017 at 6:24 PM.
    • dunstonh
    • By dunstonh 13th Mar 17, 6:46 PM
    • 89,552 Posts
    • 56,001 Thanks
    dunstonh
    • #3
    • 13th Mar 17, 6:46 PM
    • #3
    • 13th Mar 17, 6:46 PM
    When investing in a particular fund do you normally check where the fund charges are taken from, income or capital?

    With capital, it just seems discouraging when the number of units you have diminishes slightly, say every month. Used to have a stakeholder pension with Legal & General invested in the UK Recovery Fund for a year before I transferred out, and the number of units used to go down slightly every month, sold off to cover the fund charges. I know that this was more of a specialist fund that did not have much dividend income to probably cover the charges.
    Originally posted by alewin
    It is normal with acc units with no cash account as something has to pay the charges. Either they take it within the fund which results in having to have different series versions or they take it within the product and sell units (which avoids series units).

    However, it makes no difference. 5x1 or 1x5 is still the same answer.
    I am an Independent Financial Adviser (IFA). 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 an Independent Financial Adviser local to you.
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