Funds suggestions

Debt_Free_Chick

Do the expenses/costs really matter? Surely they are all reflected in the unit price and the performance - based on changes in those prices - actually reflects all the costs, whether they are hidden or explicit.

Or am I missing an important point ....

whambamboo

Debt_Free_Chick wrote:

Do the expenses/costs really matter? Surely they are all reflected in the unit price and the performance

Past performance is not a guarantee of future, and there is a large amount of luck and random variation involved in it. Lower costs make it easier to perform well in the future.

EdInvestor

They are not reflected in the Reduction in Yield, which is the official measure used to explain the effect of charges when you invest in the product.

dunstonh

Dealing costs are included in the TER.

And why should foreign funds have higher *total* costs if the TERs are the same (as they seem to be from looking at Gartmore China vs Invesco Perpetual High Income).

Some niche funds are "new" areas can have higher charges but nowadays there is little or no difference.

The obvious cost not included is the bid/offer spread. Are OEICs cheaper because they don't have one?

A unit trust with no initial charge (i.e. commission rebate = initial charge) is the same as an OEIC. Some OEICs dont have a bid offer spread (as they cant) but do have an initial charge.

Just think of it as initial charge and it will either be a bid/offer spread or an initial charge. These are always disclosed.

It's a disgrace that the FSA does not require these costs to be disclosed IMHO.But when you realise that the ones they do disclose eat up 20-30% of people's savings, you can see why they prefer to keep the rest of the charges quiet.

This is where amateurs start getting confused and this is of no help to others. 20-30% eaten up is rubbish. If the charge is 1.5% then it will be 1.5% regardless of the return. Not 20 or 30%. What Ed is saying is that over 15-20 years the fund would be around 20-30% higher if there were no charges. However, without the charges, you wouldnt have the fund to invest in in the first place. So, why worry about it.

If you put money in a cash ISA or savings account, it would be around 30-40% higher if the bank didnt take its charges. The difference is that with funds you know what the charges are. With savings accounts you dont. Would you prefer that funds operated on the same basis as savings accounts?

Once you understand the combined impact of the implicit and explicit charges, the case for holding shares directly and cutting trading to a minimum suddenly becomes quite compelling.

Its not at all compelling. Share dealing with companies in China, US, Japan, Germany, India etc would be expensive at point of dealing, you couldnt have a diverse portfolio in those areas increasing your risk significantly and managing it would be time consuming.

A spread of funds as indicated earlier in the thread probably has no more than 1% with any one company and most of it will be less than 0.3%. If a company goes under, its not going to impact on the holding. Unlike shares.

Do the expenses/costs really matter? Surely they are all reflected in the unit price and the performance - based on changes in those prices - actually reflects all the costs, whether they are hidden or explicit.

Or am I missing an important point ....

I dont think they do. The potential of the fund should be in front of the charges. If the charges are reasonable then whats the problem?

Past performance is not a guarantee of future, and there is a large amount of luck and random variation involved in it. Lower costs make it easier to perform well in the future.

If you invest in funds purely on the basis of cost you will end up with trackers. That means you have to start limiting the areas you want to invest in. It is possible to get too wrapped up in differences of 1% a year in charges. If your JPM Natural resources fund comes in at 76% this year, do you care that it cost a little more than than the FTSE100% that came in at 14%? If you focused on costs only, you would miss out on some cracking funds and reduce the overall performance potential of your portfolio.

They are not reflected in the Reduction in Yield, which is the official measure used to explain the effect of charges when you invest in the product.

Initial charges are though. TER isnt yet although some providers are moving to make them the same. With the TER usually only a small amount higher than the AMC, then its really not worth the bother.

Research with TER known and you will be fine.

EdInvestor

dunstonh wrote:

Dealing costs are included in the TER.

No they aren't.

What the TER includes


Sunday Times report on the hidden fees which double the cost of investing

dunstonh

This is like arguing over 1p when someone says they give you £100 but you only get £99.99.

If you would waste time chasing that 1p then worry about the additional charges whilst you drive between Tesco, Sainsbury and Morrisons picking up the cheapest items at the 3 the shops to make sure you havent spent a few pence more than you would have in one shop.

If you wouldnt waste time worrying about that 1p then dont let anything outside of the TER worry you.

EdInvestor

I beg to differ.

IMHO it's very worrying that half of people's savings goes in charges.The Pension Commission report states that the high charges make it almost impossible to run a proper pension system in this country.

Scroll down to read the questions by Mr Beard MP in the Treasury Commons committee to the former head of the FSA on the extra hidden charges - and how the industry lobbies to keep them secret.:cool: :mad:

dunstonh

IMHO it's very worrying that half of people's savings goes in charges.

How do you turn a 1-1.5%p.a. charge into 50?

Not many industries are forced to work on a margin around 1% p.a. Perhaps they should focus on those that have a 40% mark up and not whinging about 0.2% and trying to squeeze it by another 0.1%.

EdInvestor

dunstonh wrote:

How do you turn a 1-1.5%p.a. charge into 50?

OK let's take Whambamboo's plan to invest 20k in this fund portfolio.

Assume he gets an average of 8% annual growth and leaves his money invested for 20 years and pays no charges at all.

He would end up with 93,219.

Now let's say he gets 8% growth but pays a total of 1.5% a year in charges, reducing his growth rate average p.a to 6.5%.

His total now goes down to 70,473.

Now let's add on the hidden charges which Whambamboo hasn't been told about it: because he has a big foreign exposure, these are going to be high - an extra 1.5%. So this will reduce his growth rate to only 5%.

His total is now only 53,066. :mad:

Charges have eaten up 43% of his fund.

whambamboo

EdInvestor wrote:

Now let's add on the hidden charges which Whambamboo hasn't been told about it: because he has a big foreign exposure, these are going to be high - an extra 1.5%. So this will reduce his growth rate to only 5%.

You've said this a couple of times now, but I haven't seen yet how charges are higher with the foreign fund?