Funds suggestions

whambamboo

jem16 wrote:

These days we're lucky to manage long multiplication.

is that true? I remember doing long division in primary school in year 4. I got told off by the teacher for showing the other kids how to do short division instead. This wasn't in this country though - seems that nowadays, long division is on the GCSE syllabus?

http://www.bbc.co.uk/schools/gcsebitesize/maths/numberf/

ReportInvestor

dunstonh wrote:

With collective investments the charges are explicit so you can see what they are.

But it's just been established that they aren't explicit, and you can't see what they are.

whambamboo

dunstonh wrote:

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.

Are they really not significant? Are these managers really such geniuses that they know exactly when to go in and out of each individual stock, to the extent of turning over the entire portfolio FOURTEEN times in one year (http://www.gartmore.co.uk/NR/rdonlyres/2E7C4DBF-5ADF-47A3-A67A-A82B416BB21C/0/IFAppApplicationForm.pdf) in the case of http://www.trustnet.com/ut/funds/?fund=1866 - 1363% PTR. Are these managers investing in companies for growth, or day trading following trends in charts? And why do they not mention the portfolio turnover rate on most sites, it's surely as relevant as the charges are?

Why do people get excited that Old Mutual UK Select Smaller Companies is going from 1.5% AMC to 1.75% AMC, but pay no attention at all to its dealing costs?

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 restrict and emerging markets as well as specialist areas which would have higher costs.

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.

Agreed.

It's not possible to invest in most of the sectors for the average investor. Moreover, it's far safer to invest in these funds and forget about them than it is to invest in a few blue chip UK equities as Ed frequently suggests.

That said, I *am* concerned about the dealing costs of these funds. Not in and of themselves, as I'm happy as long as they are making money, but whether the massive levels of dealing shown here actually improve returns. Has any study shown that it is effective to turn over stocks at such a high rate? If an investment is a good one, it should grow for several years, not just a couple of weeks.

I can't really see that it can be effective to have PTRs over 200%.

jem16

whambamboo wrote:

is that true? I remember doing long division in primary school in year 4. I got told off by the teacher for showing the other kids how to do short division instead. This wasn't in this country though - seems that nowadays, long division is on the GCSE syllabus?

http://www.bbc.co.uk/schools/gcsebitesize/maths/numberf/

Yep it's true.

In the early 80s I taught long multiplication and division to Primary 5 and they could do it perfectly well. Over the last 25 years the pace has been slowed down as "new" methods have been brought in. Nowadays we teach in groups according to the child's ability. In my class I have 3 Maths groups plus 1 individual.

I was able to teach a whole class better and more effectively.

whambamboo

whambamboo wrote:

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%.

Ah sorry, it's in Ed's link:
http://www.pensionscommission.org.uk/publications/2004/annrep/chapters/ch6.pdf

The cost each way is:
0.14% broker's commission
0.225% bid/offer spread cost
0.125% price impact of buy/sell order moving price (I guess this is higher for big funds)
0.5% stamp duty (buy only)

So the cost is approx 0.74% * PTR for the UK, lower for the US due to lack of stamp duty, possibly higher in the rest of the world due to less efficient markets.

It's clear then that the Annual Expense Ratio is a smokescreen, as for nearly all funds, the dealing costs exceed the difference between the AER and AMC.

Why can't the FSA force these companies to include estimates of dealing costs as a reduction in yield?

whambamboo

jem16 wrote:

Yep it's true.

In the early 80s I taught long multiplication and division to Primary 5 and they could do it perfectly well. Over the last 25 years the pace has been slowed down as "new" methods have been brought in. Nowadays we teach in groups according to the child's ability. In my class I have 3 Maths groups plus 1 individual.

I was able to teach a whole class better and more effectively.

Ah. Looks like more evidence that the £7k/year on a prep school I'll be spending from next year will be money well spent :-)

ReportInvestor

The FSA was going to press for this but the fund management industry lobbied successfully against it on the spurioius grounds that it was information that a) would be costly to collect and b) would be difficult for investors to understand.

I guess that there is an argument that annual dealing costs may fluctuate, and so a quoted figure might be inaccurate for the forthcoming year e.g. if there were excessive market movements.

But this doesn't stop many companies maintaining a high turnover year on year.

jem16

whambamboo wrote:

Ah. Looks like more evidence that the £7k/year on a prep school I'll be spending from next year will be money well spent :-)

I put both my sons through private secondary education - best money I ever spent.

whambamboo

dunstonh wrote:

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.

Can I further clarify this?

Looking at

http://www.h-l.co.uk/fund_research/fund_search.hl?func=search&formid=1002&company=1556&sector=118&investment=&x=10&y=7

there are unit trusts (with separate sell/buy prices), and OEICs (with one price).

With the OEIC, if there is a 5% initial charge, then that charge is taken from the amount you invest. So if the OEIC costs £1, and you invest £1000, then £50 is charged, and you receive 950 units. If you sell up straight away, you get £950 back - there's no exit fee.

With the unit trust, then I assume that the sell price represents the true value of the assets (as there is not supposed to be any exit charge). The buy price should then be sell cost + commission.

So for
http://www.trustnet.com/ut/funds/?fund=807 sell price, 689.59p, with commission 5%, then the buy price is 689.59 * 1.05 = 724.07p.

But it's not, it's 740.29p, which is 7.35% above the sell price.

So there appears to be a hidden charge of 2.35% going in, even if your provider discounts the 5% initial charge.

So OEICs are cheaper than Unit Trusts, as the buy/sell cost is the same.

E.g., OEIC valued at 689.59p, if you invest £68,959, then you pay 5% initial charge, then you receive 9500 units worth 689.59

Whereas, buying at 740.29 from the unit trust, you own only 9,315 units.

Or have I missed something?

EdInvestor

Moreover, it's far safer to invest in these funds and forget about them than it is to invest in a few blue chip UK equities as Ed frequently suggests.

Not what I suggest at all of course.:) After you've acquired a good understanding of the charges problem WBB, we can discuss the risk problem in more detail.