Funds suggestions

dunstonh

EdInvestor wrote:

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.

How much in charges would he have paid had he left it on a savings account? (using 4%)

EdInvestor

Generally dealing costs and bid offer spread as well as custody and legal costs are higher, especially in emerging markets. Portfolio turnover often seems to be higher too, from what I've read.


Here's the original FSA study on the matter

The actual additional charges are unknowable unless you know the portfolio turnover which is not disclosed ( and not required to be disclosed).

This is what I find outrageous: it is not the charges themselves, it is the fact that investors are being tricked into thinking they are paying much less than they are actually paying, with the agreement of the regulator.

That's appalling.

jem16

EdInvestor wrote:

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.

You are compounding the charges Ed. The charges stay at 1.5% no matter what the return is.

Here's an example for 5 years (couldn't be bothered working out 20 years)

Based on 8% return as you said.

£20k invested

End of year 1

£21,600. Charges £324 x 2 = £648 (1.5% x 2 as you suggested )
Net £20,952

End of year 2

£22,628 Charges £339.42 x 2 = £678.84
Net £21,949.16

End of year 3

£23,705 Charges £355.57 x 2 = £ £711.14
Net £22,993.86

End of year 4

£24,833 Charges £372.50 x 2 = £745
Net £24,088

End of year 5

£26,015 Charges £390.22 x 2 = £780.46
Net £25,234.56

Following your calculations of growth reduced to 5% because of charges, £20k would have resulted in £25,526.


Can you explain why?

EdInvestor

Everything is compounded of course.

Over 5 years it looks like this, 20k @8% growth:

No charges 29,387

After explicit charges of 1.5%: 27,402

After explicit and implicit (hidden) charges of 3%: 25,526

nrsql

Think that should be 25,235.24 at end year 5 - you have given end year 6.
End year 20
50,692.04
less than Ed's total
Think Ed is calculating at 8%-3% growth i.e. taking charges at begining of year whereas this takes the charges at the end after growth hence the reduction.

jem16

nrsql wrote:

Think that should be 25,235.24 at end year 5 - you have given end year 6.

Yes you're correct. Amended my post now.

I was really just curious about the difference. As already said, without the charges you wouldn't have the fund. It's like everything else you buy - the charges are always there.

It would seem daft to me to avoid a particular fund just because the charges are higher if that fund provided better growth and protection than another fund whose charges were lower.

whambamboo

dunstonh wrote:

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.

It appears to me to be rather more significant than that:

http://www.fsa.gov.uk/pages/Library/Communication/PR/2005/041.shtml

a 'Total Expense Ratio' (TER) figure showing the costs and charges of the fund. The figure will not take account of front-end charges, exit costs or certain fund expenses such as dealing costs.

Obviously exit/entry costs are fairly transparent (and generally avoidable through discount brokers), so the thing to worry about is dealing costs, the Portfolio Turnover Rate

I found some numbers:

Gartmore China 275%
cf.
Invesco Perpetual High Income 40%

These are obviously significant figures. The emerging markets funds have much higher turnover rates.

I'm not sure what the cost of dealing is, any ideas? I found a figure saying 0.6%-2%.

If we take it as 1%, the total cost of Gartmore China jumps to 2.75% + TER, while the High Income fund adds 0.4% to its TER.

The high turnover is not particularly a foreign/UK thing as far as I can see - the Old Mutual Equity Income FUnd has 206% PTR, while the UK Smaller Companies fund, which you might imagine to be more speculative, has a 166% PTR.

Clearly this is a lot more than 1 penny in £100.....

But I guess at the end of the day, all that matters is maximum profits, so if the manager is giving away 5%+ in annual costs (as some are, with some PTRs > 600%), it's ok if they are making me money!

ReportInvestor

dunstonh wrote:

How much in charges would he have paid had he left it on a savings account? (using 4%)

Aren't we discussing shares v collective share investments?

Best not to compare apples & oranges?

jem16 wrote:

You are compounding the charges Ed.

Of course Ed is. It's the only way to do it .

Ask the person in your own school i/c financial education if compounding (on savings/investments/loans) is the foundation stone of their own financial education course. And if not, why not?

P.S. It's quite worrying IMHO that a respected and very knowledgeable IFA thought dealing costs were contained within the TER. The financial services industry has done a "good job" on its PR here . If dh doesn't know it you can bet that 95%+ of IFAs don't know it either.

jem16

ReportInvestor wrote:

Ask the person in your own school i/c financial education if compounding (on savings/investments/loans) is the foundation stone of their own financial education course. And if not, why not?

Might be difficult to find such a person in my school - I'm a primary teacher.

These days we're lucky to manage long multiplication.

dunstonh

P.S. It's quite worrying IMHO that a respected and very knowledgeable IFA thought dealing costs were contained within the TER. The financial services industry has done a "good job" on its PR here . If dh doesn't know it you can bet that 95%+ of IFAs don't know it either.

To be honest I dont care. I got sucked in by that earlier link that said it was.

These costs consist primarily of management fees and additional expenses such as trading fees, legal fees, auditor fees and other operational expenses

However, It has no relevance to looking at fund potential. I would rather invest in a fund with better potential and reasonable TER than low potential and low TER. The dealing costs just dont bother me in the slightest.

Aren't we discussing shares v collective share investments?

Best not to compare apples & oranges?

We arent comparing apples & oranges though. We are comparing purchases of single company shares in the UK against funds investing across the world, including some restrictive and emerging markets as well as specialist areas which would have higher costs.

Whilst Ed compounds up the annual management charge, it should be fair to comment that implicit charged savings/investments such as savings accounts and ISAs also suffer the same compounding effect. You just dont see it as the rate of return is paid (the interest rate) after charges. With collective investments the charges are explicit so you can see what they are.

Shares do not have an annual management charge and that is a positive point but the funds discussed in this thread and the amount spread across them would require the purchase of around 300 companies across the world if held on single share basis. If you said £10 a deal then thats a £3000 charge. If you rebalance every year and one third need altering to retain balance then thats £1000 a year. That rebalancing is possible without charge in unit trusts/oeics.