TER's - How are they calculated?

Cardinal-Red

I am hopefully becoming a more savvy investor and looking at the use of ETF’s to reduce costs where applicable.

I understand that charges eat into returns on funds, and these are measured by TER’s. What I don’t understand is how these are calculated.

For example I use HL to hold my funds and if I am considering this fund:

http://www.h-l.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/s/schroder-global-property-income-maximiser-accumulation

So the initial charge is 3.25% fully discounted to nil. Then there is annual management charge of 1.50% discounted by 0.10% meaning 1.40% - so how does this translate into a TER of 1.75%?

dunstonh

The TER will not include the rebate on trail commission.

The fund manager has to work out charges that are not included in the AMC and show them included in the TER.

BTW, ETFs are not necessarily cheaper or better than institutional UT trackers. Indeed, you have to be wary of more things when using ETFs. The ETF methodology needs to be looked at (for example replication, stratified sampling, optimisation....) and you have premium/discount to be aware of as well as dividend reinvestment (some ETFs hold divs in cash and pay out periodically which can create a drag). The Flash crash last year hit ETFs (Russell 1000 growth index fund dropped by more than half its value in minutes). Distributor/omicile status needs to be considered. There are also major concerns over synthetic ETFs as well.

Every fund universe has pros and cons. So, make sure you know these before you act.

xrjtg

The annual management charge is the explicit fee taken by the managers in return for looking after your money. The TER also includes incidental expenses related to the management of the fund—although I couldn't tell you what these are made up of. The TER figure is the one most relevant to you.

Rollinghome

Cardinal-Red wrote: »

I am hopefully becoming a more savvy investor and looking at the use of ETF’s to reduce costs where applicable.

The advantage of ETFs over a low cost UT/OEIC tracker is that it can be traded intraday at a known price instead of just once a day at an unknown price and there's a far wider range. If you want something mainstream like a FTSE tracker and don't intend to be a frequent trader then a UT/OEIC tracker with a TER below 0.5% might be the better bet.

The AMC is the management charge including trail commission etc. TER stand for Total Expense Ratio but is misleading because it's often far from being the total expenses. It includes the AMC plus some other items like administration and custodian fees.

The largest additional costs not included in the TER are the trading costs of the fund incurred when it buys and sells assets including stockbroking fees etc. When a fund is actively managed this can mean a further 1-2% a year in addition to the published TER is taken from returns.

It's the high charges of unit trusts in the UK, up to twice as high as in the US, that causes most funds to underperform the indices. One reason suggested for the high costs is that there are too many diddy little funds doing much the same thing.

"Fund management fees eat away an average of 43 per cent of investors' returns over a ten-year period, according to an investigation by Money Observer into the true cost of investing." http://www.moneyobserver.com/news/10-09-30/hefty-charges-slash-investor-gains-almost-half There's a link to a PDF showing just how small a percentage of the returns for some funds actually reach the investor and how much is gobbled up in charges.

Richard_DandR

Of course Rollinghome as usual exaggerates the dealing charges effect on the TER.

Using IP High Income Fund, the TER disclosed in the accounts is 1.69% and this is based on total expenses of £163,328,000. Commissions on transactions in the year total £4,946,000 which would increase the TER to 1.73%. (Figures for year end 31.12.2010)

So it adds just 0.04% to the TER and not 1-2%.

Some funds will have higher turnover than IP HIgh Income Fund so the extra charge will be greater.

Perhaps Rollinghome can provide an example of a fund where dealing charges add 2%.

darkpool

I believe rollinghome is correct in the additional fees of 1-2% on top of the TER.

pinkteapot

xrjtg wrote: »

The annual management charge is the explicit fee taken by the managers in return for looking after your money. The TER also includes incidental expenses related to the management of the fund—although I couldn't tell you what these are made up of. The TER figure is the one most relevant to you.

The TER will include things like:

- Management fee
- Custodian fee (if a third party custodian is used by the fund manager)
- Administrator fee (again, if a third party administrator is used)
- Legal fees
- Auditor fees

Richard_DandR

darkpool wrote: »

I believe rollinghome is correct in the additional fees of 1-2% on top of the TER.

Not in the case of IP High Income Fund. He is out by a factor of 25 to 50.

pressuredrop_2

£163 million to run a fund.

Nice.

darkpool

Richard_DandR wrote: »

Of course Rollinghome as usual exaggerates the dealing charges effect on the TER.

Using IP High Income Fund, the TER disclosed in the accounts is 1.69% and this is based on total expenses of £163,328,000. Commissions on transactions in the year total £4,946,000 which would increase the TER to 1.73%. (Figures for year end 31.12.2010)

So it adds just 0.04% to the TER and not 1-2%.

Some funds will have higher turnover than IP HIgh Income Fund so the extra charge will be greater.

Perhaps Rollinghome can provide an example of a fund where dealing charges add 2%.

IP high income has a total fund value of £10.3billion, it has a 30.21% annual holdings turnover. You seriously think the total cost of selling/ buying over £3billion worth of shares is under £5m? It looks like you've not checked your figures.

Richard_DandR

I have taken them from page 44 of the accounts (46 of the PDF).

http://investor.invescoperpetual.co.uk/UK/onshoreliterature/UK_Series_MRA_long.pdf

The commission rate was 0.155% for purchases and 0.137% for sales which I think is not out of line with normal rates for institutions. So, on total transactions of £3.4bn and an average of 0.145% commission, I make that £4.9m.

I did those calculations for all the Invesco Perpetual funds (until I took early retirement in 2009) as part of compiling and checking their OEIC accounts.