Funds suggestions

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dunstonh wrote:

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

The arithmetic doesn't matter what % you use, dh.

The average interest rate spread of the top 10 building societies is 1% so a "charge" of 0.5% on savings would seem about right.

And the big foreign banks operating internet accounts have no branches - so that will more than make up for having to pay shareholders.

dh's initial foray into this area on this thread was certainly way off beam:-

dunstonh wrote:

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.

So the answer to dh's question is that the "effect" of charges would be to reduce your savings by less than 11% over the 20 year period used as the example - but only if you foolishly kept your money in the same place.

In fact, it's very easy to keep all your money in "teaser" accounts that operate above the bank base rate all the time - so I don't really accept the concept of dh's charge comparison [between savings accounts & funds] and totally reject the original numbers he randomly threw out earlier.

dh's comparison has other weaknesses - the best savings accounts charge less, whereas the best funds tend to charge more (isn't it funny how economies of scale don't seem to operate in the fund management industry :rolleyes: ).

I know what the best savings account is going to be over the next 3 months (& it's the one that is charging me 0% or less).

Whereas the good past performance of funds that are likely to do best will mean, in practice, that charges are higher rather than lower at those funds.

whambamboo

EdInvestor wrote:

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.

You certainly have

http://forums.moneysavingexpert.com/showpost.html?p=1244320&postcount=13
http://forums.moneysavingexpert.com/showthread.html?t=59409

Among many other examples

EdInvestor

You may find it easier to see the impact of the hidden charges by looking at the accounts of an investment trust, such as this one: Aberdeen Asian Income trust

Note especially "Other operating expenses" (that's the bits in the TER) and "Transaction costs" (the bits that are not in the TER).This particular IT has a 1% AMC as well. IT AMCs are usually lower than UT and OEIC AMCs.


This IT is run by a well respected manager called Hugh Young with a very long track record in the region.He also runs the Aberdeen Asia Pacific OEIC,which has an AMC of 1.75% plus an initial charge +TER +transaction costs.

It's my impression that Mr Young keeps churning fairly low , like Mr Woodford over at Invesco Perpetual.

Debt_Free_Chick

whambamboo wrote:

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.

AIUI, that differential is not constant i.e. it's not true to say that the buy price is and always will be 7.35% above the sell price.

However, the spread between the two prices is governed by the FSA and both the maximum offer price and the minimum bid price is regulated. The maximum offer price is based on the net asset value of the fund, using the mid-market price for the underlying assets, which is then adjusted for to reflect fees, charges and other expenses. Then the notional dealing costs are deducted (to cover brokers' commission and stamp duty). This results in the creation price, which measures the full cost of creating a unit. Similarly, the minimum bid price is intended to reflect the full cost of liquidating or selling a unit.

You should note that the fund manager has discretion as to whether to pass on the notional dealing costs in full, or not, when setting the unit the price.

Having determined the maximum offer and minimum bid prices allowed under FSA rules, the actual prices for the fund concerned are then calculated. These reflect any imbalance between the number of buyers and sellers in the fund.

If there are more buyers than sellers, then the offer price may move towards the true creation price. If there are more sellers than buyers, then the bid price may move towards the true cancellation price.

Whilst single pricing sounds more appealing, you need to remember to take into account any dilution levy - again, the dilution levy depends on any imbalance between the number of buyers and sellers. If there are more buyers then sellers, then a dilution levy may be applied to the price at which new investers buy units. Conversely, more sellers than buyers will result in a dilution levy applied to the price at which units are sold. The dilution levy is a discretionary charge, which the manager may or may not apply. If it is not applied, then the buying/selling costs are met by the fund and so existing unit holders are, effectively, paying costs that are nothing to do with them.
If it is applied, it's met by the buyers or sellers only, and not existing unit holders.

In practice, there should be little difference between single and dual pricing. However, with single pricing, the costs are more explicit. With dual pricing, they're reflected in the unit price.

At the end of the day, the charges are what they are, irrespective of the way in which the units are priced. In theory, two funds with the same charges investing in exactly the same underlying assets and with the same number of buyers and sellers ought to result in exactly the same net value - one will do so through pricing alone, the other will do so via combination of pricing, explicit charges and dilution levies.

What is difficult (and we prove it in this thread) is actually nailing them down before you decide to invest. But I agree with dunstonh that charges are secondary to picking a manager that is likely to perform well in the future. If the manager performs well, I don't mind paying a bit extra for that.

whambamboo

Debt_Free_Chick wrote:

AIUI, that differential is not constant i.e. it's not true to say that the buy price is and always will be 7.35% above the sell price.

Indeed not.

But 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

the bid/offer spread for the Unit Trusts is:

2.5% (0% initial charge claimed)
7.37% (5% charge)
6.62% (5.25% charge)
6.71% (5.25% charge)
7.18% (5% charge)
6.11% (5% charge)

So there is a hidden charge above and beyond the one listed in every case.

However, the spread between the two prices is governed by the FSA and both the maximum offer price and the minimum bid price is regulated. The maximum offer price is based on the net asset value of the fund, using the mid-market price for the underlying assets, which is then adjusted for to reflect fees, charges and other expenses. Then the notional dealing costs are deducted (to cover brokers' commission and stamp duty). This results in the creation price, which measures the full cost of creating a unit. Similarly, the minimum bid price is intended to reflect the full cost of liquidating or selling a unit.

You should note that the fund manager has discretion as to whether to pass on the notional dealing costs in full, or not, when setting the unit the price.

Having determined the maximum offer and minimum bid prices allowed under FSA rules, the actual prices for the fund concerned are then calculated. These reflect any imbalance between the number of buyers and sellers in the fund.

If there are more buyers than sellers, then the offer price may move towards the true creation price. If there are more sellers than buyers, then the bid price may move towards the true cancellation price.

Whilst single pricing sounds more appealing, you need to remember to take into account any dilution levy - again, the dilution levy depends on any imbalance between the number of buyers and sellers. If there are more buyers then sellers, then a dilution levy may be applied to the price at which new investers buy units. Conversely, more sellers than buyers will result in a dilution levy applied to the price at which units are sold. The dilution levy is a discretionary charge, which the manager may or may not apply. If it is not applied, then the buying/selling costs are met by the fund and so existing unit holders are, effectively, paying costs that are nothing to do with them.
If it is applied, it's met by the buyers or sellers only, and not existing unit holders.

In practice, there should be little difference between single and dual pricing. However, with single pricing, the costs are more explicit. With dual pricing, they're reflected in the unit price.

At the end of the day, the charges are what they are, irrespective of the way in which the units are priced. In theory, two funds with the same charges investing in exactly the same underlying assets and with the same number of buyers and sellers ought to result in exactly the same net value - one will do so through pricing alone, the other will do so via combination of pricing, explicit charges and dilution levies.

Looking at the Unit Trusts above, it's fairly obvious that you are not buying and selling at the same rate - in every case you are paying a bit extra to enter the fund. But looking at the OEICs, there is no dilution levy listed anywhere on HL's page for the fund. Is this deliberately hidden? Or do OEICs not charge this generally - which surely makes them cheaper to enter than Unit Trusts?

I must confess the charging structure seems deliberately opaque.

EdInvestor

From the HL Vantage Key Features documents

Below are tables that show how the charges deducted from the funds can affect what you might get back. To calculate these figures we have chosen an initial investment of £1,000 and then deducted the costs of buying the units/shares. It is then assumed that the investment grows by 6%. This is a standard growth rate used by financial companies to allow you to compare their charges. Allowance is also made for the annual management
charges and other expenses borne by the fund, which include trustees fees and expenses, registrar fees, audit fees and FSA fees. Dealing costs are not included.

The last line of the table shows that over 10 years the effect of the total charges and expenses could amount to £401. Putting it another way, if the growth rate were 6%, which is in no way guaranteed, this would have the effect of reducing it to 3.3% a year.


Stamp Duty Reserve Tax (SDRT)
The tax is charged when units/shares are sold back to the manager at 0.5% on investments which are subject to SDRT. Some managers will charge SDRT to the fund, others will charge investors when transactions are made. There are circumstances in which this tax liability may be reduced, and it is generally thought that in normal trading conditions this charge will have no significant effect.

How much will Hargreaves Lansdown receive for arranging this investment?

For arranging this investment Hargreaves Lansdown is entitled to receive renewal commission of up to 1% per year. At 1% on a typical investment of £3,000 we would receive an amount equivalent to £30,and if the investment doubled in value to £6,000 this would amount to £60. Hargreaves Lansdown is
also entitled to receive initial commission of up to 4%. On a typical nvestment of £3,000 this would be equivalent to £120. Commission is paid for out of the deductions. All or part of these commissions will be used to help fund the initial savings and the ongoing loyalty bonuses we offer.

So 40% is going out over 10 years even before the transaction costs are deducted in this case.

Debt_Free_Chick

Just to be clear, not only does the spread differ from fund to fund (where dual pricing is used), but the spread for any one particular fund can vary, daily.

whambamboo wrote:

But looking at the OEICs, there is no dilution levy listed anywhere on HL's page for the fund. Is this deliberately hidden? Or do OEICs not charge this generally - which surely makes them cheaper to enter than Unit Trusts?

The dilution levy is charged on the day of the transaction -if it is applied. It's discretionary, so the manager may choose not to apply it. If it is to be applied, then it must be stated in the trust document.

In the key features document, the second bullet point under M on page 2 states ...

"OEICs have a single price, which is calculated by dividing the total assets of the fund, valued on a mid basis less liabilities, by the number of shares in issue. In situations where unusually high levels of purchases or sales threaten the interests of the funds other investors, the ACD, may levy a dilution levy or operate a swinging price. Details of these and the circumstances in which they may be levied are available on request."

Both the spread, in dual priced funds, and the dilution levy, in single priced funds, are calculated when the unit price is calculated. Neither is a constant percentage - they "are what they are" on the day concerned.

Debt_Free_Chick

And, from the Aberdeen prospectus page 36, with my emphasis added

When the Company buys or sells underlying investments in response to a request for the issue or redemption of shares, it will generally incur a cost, made up of dealing costs and any spread between the bid and offer prices of the investment concerned, which is not reflected in the issue or redemption price paid by or to the shareholders. With a view to reducing the effect of dilution (which, if it is material, disadvantages continuing shareholders) the ACD has decided that its policy of continuing fund value is that it is entitled to require payment of a dilution levy for the benefit of the continuing fund, to be added to the sale price or deducted from the redemption price of shares as appropriate. The ACD may only impose a dilution levy in a manner that is, so far as practicable in the circumstances, fair to all shareholders and potential shareholders. It is not possible to predict accurately whether dilution will occur at any point in time. In cases where a dilution levy is imposed the value of the capital of the Scheme Property of a Fund will not be adversely affected by dilution. The ACD’s current policy is normally to impose a dilution levy in the following circumstances:
• in respect of shares redeemed on a particular Dealing Day, where the net redemptions of shares linked to the Fund in which the redemption is instructed exceed 5% in value (calculated by reference to their current price) of the issued shares linked to that Fund; or
• in respect of shares purchased on a particular Dealing Day, where the net purchases of shares linked to the Fund in which the purchase is instructed exceed the same percentage.
The dilution levy may also be charged:
(a) where a Fund is in continual decline;
(b) on a Fund experiencing large levels of net sales relative to its size;
(c) in any other case where the ACD is of the opinion that the interests of shareholders require imposition of a dilution levy.
If charged the dilution levy will be paid into the relevant Fund and become part of the relevant Fund.
In the 12 months up to 31 December 2005 a dilution levy was charged as follows:
For Aberdeen Japan Growth Fund - on two occasions. The average rate of dilution levy was 0.1%.
For Aberdeen Ethical World Fund - on one occasion. The average rate of dilution levy was 0.13%.
For Aberdeen Long Bond Fund - on two occasions. The average rate of dilution levy was 0.03%.
All other Funds did not apply a dilution levy.


HTH

whambamboo

Debt_Free_Chick wrote:

Just to be clear, not only does the spread differ from fund to fund (where dual pricing is used), but the spread for any one particular fund can vary, daily.

The dilution levy is charged on the day of the transaction -if it is applied. It's discretionary, so the manager may choose not to apply it. If it is to be applied, then it must be stated in the trust document.

In the key features document, the second bullet point under M on page 2 states ...

"OEICs have a single price, which is calculated by dividing the total assets of the fund, valued on a mid basis less liabilities, by the number of shares in issue. In situations where unusually high levels of purchases or sales threaten the interests of the funds other investors, the ACD, may levy a dilution levy or operate a swinging price. Details of these and the circumstances in which they may be levied are available on request."

Both the spread, in dual priced funds, and the dilution levy, in single priced funds, are calculated when the unit price is calculated. Neither is a constant percentage - they "are what they are" on the day concerned.

That dilution levy is described as 'unusual'. Surely this means that it is generally not applied (which means that existing holders share the cost of your purchase)? Whereas with unit trusts, the effective dilution levy (the bid/offer spread) appears to always (or nearly always) applied, as seen from the bid/offer price spreads I quoted earlier. So if you intend to buy and hold, the unit trust will work out cheaper, as you pay the cost going in, but don't have to pay for the creation of new units from new investors, whereas the OEIC is cheaper for a short-term investor, because unless I'm paying a dilution levy (unusual it says), there's no entry/sale cost.

Debt_Free_Chick

whambamboo wrote:

That dilution levy is described as 'unusual'.

I didn't read it in quite that way.

The point is, that if the manager has the discretion to apply a dilution levy then he can. And you don't know whether the manager is going to apply it, in advance, whether you're a buyer or a seller.

If he doesn't apply it - and you're an existing unit holder - then you are effectively paying for the costs of selling units to new investors or buying them back from existing investors who are selling.

Swings and roundabouts, I think. As an existing holder, I would want the manager to apply the dilution levy to new buyers/sellers. As a buyer/seller, I would prefer he didn't

In either case, it seems to me that the full costs are not entirely transparent. So you pays your money and takes your chance

Regards