TER's - How are they calculated?

Slim

I'm probably missing something, but Richard Dand R, doesn't turnover apply to both buying and selling so that you need to double your £4.9M figure?

darkpool

stamp duty to buy shares in the uk is 0.5%. the figures in the document would not include the market makers cut either

Richard_DandR

Slim,

Purchases before transaction costs were £1,729,491,000 (commission £2,685,000) and sales were £1,646,599,000 (commission £2,261,000). Total tarnsactions £3.4bn and commission £4.9m. You can see the accounts on the link.

Darkpool,
Stamp Duty was £4,042,000.

The fund buys at the dealing price and will select the most favourable from the various market makers available. Only the market maker will know what cut he is taking on the deal. It is likely the fund is getting much keener prices than an individual.

The formula for the TER calculation is in FSA regulations and not something designed by the fund management industry to deceive unit holders.

darkpool

From the Daily Telegraph

"On average, trading costs can add another 1 per cent to your annual fees but some argue that managers buy and sell shares simply to rake in this extra revenue."

darkpool

from the Financial Times

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Alan Miller, founder of SCM Private, points out that the average UK All Companies fund has an annual turnover rate of 89 per cent. Each trade, he calculates, costs 1.04 per cent – comprising 0.5 per cent stamp duty, 0.3 per cent commission paid to stockbrokers (0.15 per cent on both purchase and sale) and 0.24 per cent (0.12 per cent each year) on the bid-offer spread. This adds 0.9 per cent to the stated average total expense ratio (TER) of about 1.6 per cent.
However, none of these costs appears in a fund’s TER. Investors can check a fund’s annual statement for details of extra costs incurred in dealing, such as 0.5 per cent stamp duty and commission to stockbrokers – but bid/offer spread costs are not included at all.

dunstonh

Alan Miller, founder of SCM Private, points out that the average UK All Companies fund has an annual turnover rate of 89 per cent. Each trade, he calculates, costs 1.04 per cent – comprising 0.5 per cent stamp duty, 0.3 per cent commission paid to stockbrokers (0.15 per cent on both purchase and sale) and 0.24 per cent (0.12 per cent each year) on the bid-offer spread. This adds 0.9 per cent to the stated average total expense ratio (TER) of about 1.6 per cent.
However, none of these costs appears in a fund’s TER. Investors can check a fund’s annual statement for details of extra costs incurred in dealing, such as 0.5 per cent stamp duty and commission to stockbrokers – but bid/offer spread costs are not included at all.

Its also worth noting that the average UK all companies fund outperforms a FTSE all share tracker.

darkpool

The same article also says high turnover reduces returns i personally would stick to a tracker. after all a ftse100 tracker is likely to have a lower turnover than an actively managed fund

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Miller argues that funds with lower turnover actually perform better. The 20 funds with the highest turnover last year in the IMA’s All Companies sector returned just 4.7 per cent to investors in the three years to the end of February. The 20 funds with the lowest turnover had an average performance of 16.8 per cent over the same period.

dunstonh

The same article also says high turnover reduces returns i personally would stick to a tracker. after all a ftse100 tracker is likely to have a lower turnover than an actively managed fund

This is the problem when you look at bits of data in isolation. It doesnt give you the full story.

Source: Finex upto close of business on 04-05-2011 for 3 years cumulative on UK all companies sector.

Sector average: 4.28%
L&G UK index tracker: 4.07%
HSBC ftse all share index: 4.12%
HSBC ftse all share index retail version: 3.50%
L&G 100 index institutional version: 3.31%
L&G 100 index retail version: 1.64%
Fidelity moneybuilder 3.30%
HSBC ftse 100 index : 1.51%

So, all the low turnover accounts are below average in performance. Looking at the funds you were likely to have chosen 3 years ago if you wanted managed and you have:
Liontrust Spec Sits: 42.44%
L&G UK Alpha: 66.94%
M&G Recovery: 18.95%

That is not picking the best performers with hindsight (as they are not the best performers). It was picking the most obvious contenders at that time. M&G recovery was certainly on the list of many. Liontrust spec sits and L&G UK alpha have been in my portfolio since then.

To give balance, there are some pretty poor performers in that same period who would have higher turnover but you are less likely to have had them in your portfolio (although people do. I suspect many are legacy going back years without reviewing them). Mainly your less focused and more generic UK growth funds (which personally, I see little point using as a tracker would be better if you want that sort of thing).

darkpool

i agree that trackers are likely to have a similar performance. active management is likely to have a more varied performance (from dire to amazing)

it looks like your active management examples concentrate on the better performers.

i believe there is no firm evidence that active management on average delivers better returns than trackers.

dunstonh

i believe there is no firm evidence that active management on average delivers better returns than trackers.

There is some that show it is and some that show it isnt. Its never simple and often depends on the individual and their willingness to adapt, monitor and review. This is why you should never shut out either option as being suitable. Mix and match is very often the best option.

If you plan to buy and forget then trackers are nearly always going to be better. (unless you are talking about a self balancing portfolio fund)

If you plan to self select, monitor and adjust with the cycle and use more focused areas then managed can offer you greater potential. That can be highlighted in the UK all companies sector where bog standard UK growth managed funds tend to be a waste of time and dont offer enough potential for outperformance to make the risk of underperformance worth it (tracker is likely to beat them more often than not). Whereas picking a recovery or special sits fund at the right time in the economic cycle can be a very easy decision with enough potential for outperformance to make the risk of underperformance worth it. If the potential to outperform is likely to result in just an extra 4% growth above average in the year then its probably not worth the risk. If the potential to outperform could yield 20-40% then it can become worth the risk of underperformance.

Some markets are also becoming increasingly more suitable for trackers. partly due to maturity and partly due to lack of choice on the managed side.