H-L introduces a Tracker Platform Charge

jamesd

grey_gym_sock wrote: »

but you're assuming that the dilution levy is lost money. since it's paid into the fund, you actually benefit from it as well as paying it, and the longer you stay invested, the greater the benefit.

The calculation was for the 0.5% claimed to be SDRT that is charged in the Vanguard fund but not the HSBC fund. The fixed dilution levy is in addition, with undisclosed amount.

Neither I nor other investors in general can benefit because the effect is to produce a performance that is higher than the real performance, by subsidising the reported ongoing performance with the initial charge. Misleading performance numbers are not a net benefit to anyone except the fund management company, which gains unjust sales as a result.

I agree with you that for earlier buyers there is a pyramid scheme effect, where they could eventually gain from the initial charges paid by later buyers.

SnowMan wrote: »

As grey gym sock points out that's completely wrong because you have all the 0.5% SDRTs of all the investors putting money in between when you buy in and when you sell going into the fund, and you get your share of those 0.5%s which you wouldn't get with HSBC. It is when your share of those 0.5%s exactly equals the amount you yourself contributed in SDRT that you can effectively ignore SDRT.

Where is the gain for a typical investor in having to pay 0.5% up front then getting it repaid to them over many years by other investors doing the same?

All of that 0.5% doesn't get paid to the investor, some really will be SDRT.

The TER difference has to cover both the real SDRT and the inflated top-up to bring it up to the 0.5% charged. In the 16.7 year calculation I assumed that it was all going on SDRT and none going into the fund. The greater the fixing of the fund performance by charging more than the real SDRT and paying the excess money into the fund, the shorter the break even time.

It has the same flaw as every pyramid scheme: eventually you run out of new investors and the subsidy goes away or becomes small compared to the value already invested. At that point the ones who are buying won't recover the money from later buyers. The early investors could do quite well out of it, but not the later ones.

SnowMan wrote: »

They said they were planning to bring the clean class of HSBC trackers onto their platform on 15th and 16th November.

That would be an interesting development given how easy it is to hold investments in lots of different places these days.

gadgetmind

jamesd wrote: »

Where is the gain for a typical investor in having to pay 0.5% up front then getting it repaid to them over many years by other investors doing the same?

The alternative is to pay a slice of it every year in the form of higher TER and/or greater tracking error.

While I'm no fan of any kind of fees, one-off fees that are paid up-front suit my LTBH strategy far better than do ongoing "thousand cuts" fees.

jamesd

Or to pay only the actual cost of the SDRT, not an inflated cost. Whether it's actual cost or inflated cost the break even time matters. I doubt that my average holding time in the same fund at the same place is going to exceed even five years without at least some selling.

SnowMan

jamesd wrote: »

Where is the gain for a typical investor in having to pay 0.5% up front then getting it repaid to them over many years by other investors doing the same?

Paying the 0.5% reflects the costs the investor would have to pay if buying the individual shares included in the fund themselves in the sense that they would have to pay stamp duty on the purchase.

With the HSBC fund it would be possible for an individual investor to identify when there were more sellers than buyers and buy into the fund then, and subsequently identify when there were more buyers than sellers and then sell then making a profit even if the market is completely flat. While HSBC could apply a dilution levy (I nervously use that term fearing a tautological quibble) if someone did that it wouldn't always be easy for them to spot. Very unlikely to be a problem with Vanguard because of the upfront 0.5%.

jamesd wrote: »

All of that 0.5% doesn't get paid to the investor, some really will be SDRT.

You are mixing up different points again.

With both HSBC and Vanguard if there are more buyers than sellers into the fund on a day then stamp duty will have to be paid by each fund in relation to the excess of buyers than sellers.

However the DIFFERENCE between HSBC and Vanguard is that with HSBC you don't pay a 0.5% up front SDRT and you don't get the FULL amount of the 0.5% SDRTs going into the fund to benefit investors.

As a consequence the single unit price you buy in at with Vanguard doesn't wobble much (once you have taken out tracking movements). The stamp duty that the fund saves by matching buyers with sellers is distributed in what Vanguard would probably say is a fair way over time to smooth out the wobble.

With HSBC you are subject to the wobbles of the single price (which are probably 0.5% or more over days) depending on whether there are more buyers than sellers on the day you yourself buy.

You pays your money and takes your choice which you prefer.


I think there is a danger (partly my fault) that this thread is digressing away from the interesting issue of the new lower HSBC tracker class and the HL platform fee so perhaps we could get back on track?

jamesd

Yes, you can time the market to benefit when there is a pricing tunnel or switching from bid to offer basis for a unit trust.

Say there are 95% buys and 5% sells on a particular day. Instead of 0.5% SDRT the actual SDRT bill would be 0.45%. The Vanguard investors pay 0.05% more than the HSBC investors and that acts as a subsidy for the performance of the ones who got in early. The HSBC investors don't get to dodge paying the SDRT cost, that's why there are pricing tunnels - the tunnel shifts the price as required to recover the SDRT and share buying costs. But unlike the fixed Vanguard amount, there's no added pyramid scheme effect that benefits longer term holders at the expense of later buyers. To benefit from the Vanguard scheme you have to hope that there are sufficient later buyers to let your cut of their subsidy cover your extra cost. And that won't be true for the later buyers because it has the same flaw as every pyramid scheme - it saturates the market eventually.

The HSBC fund and platform option looks like an unalloyed good. Not really much to discuss about it.

What I want to see is a really good and low cost MSCI or FTSE World ex UK option. I think those make a really good core holding. Though ex UK and ex US could be interesting as well. From the look of it HSBC might be putting together the components of a world tracker so you can mix and match to adjust the regional weightings as you choose. if it does that then adds some world trackers that use those sub-funds it'd be very interesting if the price and performance are right.

gadgetmind

jamesd wrote: »

What I want to see is a really good and low cost MSCI or FTSE World ex UK option. I think those make a really good core holding.

I use the Vanguard Global ex UK as my core holding.

From the look of it HSBC might be putting together the components of a world tracker so you can mix and match to adjust the regional weightings as you choose

Yes, there are some interesting moves afoot.

BTW, I hold the HSBC FTSE 250 tracker alongside my Vanguard funds. My thinking (ha!) was that it would add more smaller caps and also that the FTSE 250 would outpace the FTSE 100 as the recession eased.

Dunno about the former, but the latter has certainly been true so far and last time I peeked ISTR my mid cap holdings had about twice the %age gain of the 100.

Of course, this is market timing, which we all know doesn't work.

JohnRo

jamesd wrote: »

But unlike the fixed Vanguard amount, there's no added pyramid scheme effect that benefits longer term holders at the expense of later buyers.

A column surely?

Pyramid implies the need for new money in ever increasing amounts to keep the whole thing going. I don't see how that applies to Vanguard trackers, it's only a small number of their trackers that impose these dilution levies anyway.

gadgetmind

gadgetmind wrote: »

Dunno about the former

Hmmm, of course I *do* know that it adds more smaller caps, what I don't know if whether these will give long term out-performance.

This is why I used the HSBC fund as I can ditch it free of charge as and when I want and put the proceeds into more evenly weighted holdings.

SnowMan

Monevator covers the new clean class of HSBC trackers (and where to get them) in a new article today here (scroll down to news slash).

jamesd

gadgetmind wrote: »

I use the Vanguard Global ex UK as my core holding.

I use it as part of a core holding. Also some in a world ex UK tracker ETF. However, I purchased the Vanguard fund before I was aware of their treatment of initial charges and it's possible that I will now reject using Vanguard for future investments on ethical grounds.

gadgetmind wrote: »

Of course, this is market timing, which we all know doesn't work.

Shhh.... if you keep that up I'll have to quote your own practices as countering your claim to believe that humans can't outperform other humans or trackers...

JohnRo wrote: »

Pyramid implies the need for new money in ever increasing amounts to keep the whole thing going. I don't see how that applies to Vanguard trackers

The initial charge that exceeds the tax it's claimed to be for. That provides a subsidy for existing holders. The subsidy per holder for each Pound purchased decreases as the total assets under management increases. The end state is one of:

1. the fund size becoming stable at low ongoing buying levels with late buyers not seeing enough later buyers for them to recover the extra cost they paid. This is the partial pyramid scheme end game.
2. the steady buying and selling by some acting as an ongoing charge to them that subsidises the profits of the ones that don't sell. This is the cross-subsidy end game where there's an ongoing boost to the reported performance based on a charge that isn't reported in year by year performance figures. Only a small part of the total return will be this portion but it might be enough to have a significant effect on the tracking error compared to competitors.

I view both of those end games as unethical.

Recovery of actual costs is completely fine.

JohnRo wrote: »

it's only a small number of their trackers that impose these dilution levies anyway.

This is mainly about the tax-related initial charge, not the dilution levy. Though they say that they use a fixed dilution levy, so that may be more or less than the actual cost. If it's consistently more then the same considerations would apply. I don't think they say which funds have the dilution levy, it's part of their general fund description covering them all. The tax charge does apply only to specific named funds.