H-L introduces a Tracker Platform Charge

jamesd

grey_gym_sock wrote: »

and equally unethical not to have a high enough initial charge to cover the costs of units being created and redeemed, so that long-term holders are subsidising short-term holders?

That would depend on whether it is systematically charging more than those costs. Funds usually balance the two out and avoid charging more than the actual costs for the balance of buying and selling at a particular time, either shortish term or longer term via the AMC. What the Vanguard funds seem to be doing is systematically charging more than the actual costs and using that to subsidise the ongoing performance and that sort of thing is problematic.

grey_gym_sock wrote: »

on this principle, are there any ethical funds at all?

Yes. Every fund which on average charges no more to purchasers or sellers than the actual costs involved in their activities. It's only when there is a systematic and ongoing overcharge or undercharge that I'd have an issue with it.

There seem to be three ways that funds handle this:

1. An AMC that on average covers the costs, ideal for those who probably won't buy and sell very often but want to be able to do it when it seems right. Likely to be good for funds with fairly stable sizes, where on average the purchases and sales will be fairly well matched, so the net extra cost in the AMC won't be substantial.
2. Initial charges, whether from a windowed approach or bid and offer pricing or bid and offer basis that balances the supply and demand to cause those buying and selling to pay most of the costs they impose at the time of the transaction. The sort of thing that long term buy and hold investors would like. Also something that may be better for a fund that is rapidly growing, where the mismatch between purchases and sales would impose a too high increase in the AMC.
3. Vanguard. Apparently systematically charging buyers more than the actual costs of their activity and using that to subsidise ongoing performance.

I'm content with either of the first two ways. You'd probably prefer the second of those two to the first. I'd prefer some of each, so I can have a core and a section that I'll use to trade based on market conditions.

I'm not content with schemes that have the effect of taking initial charges that exceed costs and then use the excess to increase the reported performance.

jamesd

wriggly wrote: »

What you're missing is that even when the shares do not need to be bought, due to a matching fund unit seller, the fund still pays the 0.5% SDRT! That is, when there is a matching buy and sell, the fund can avoid other transaction costs, but it cannot avoid the SDRT. Hence, there is no issue of excess gains to the fund.

See the short description of Schedule 19 SDRT on page 5:

"SDRT is also charged where shares of a fund investing in UK equities are redeemed and subsequently re-issued.

The 0.5% Schedule 19 SDRT is levied when investors sell their units/shares back to the fund. This charge can be reduced by a preset ratio if there are more issues than surrenders during a given two-week period, or if a fund invests in exempt assets (such as non- UK equities)."

wriggly wrote: »

It is difficult to estimate an appropriate charge in advance, and a randomly varying charge set at the end of each day would be even worse.

Traditional unit trusts do this to some extent each day by choosing whether to price purchases on bid or offer basis (a different thing from bid or offer price) and potentially by having additional levies for large trades.

wriggly wrote: »

Vanguard sets a reasonable estimate

I really doubt that a reasonable estimate of the amount of SDRT due for the Vanguard FTSE tracker is that there will be 100% of SDRT to pay.

wriggly wrote: »

and changes it as funds grow and expenses change. For example, Vanguard has reduced the purchase and redemption levies for the Emerging Markets fund from 0.4% at launch to 0.25% now.

That's a good thing and I'm glad that they do adjust it.

wriggly wrote: »

Then you should be singing the praises for Vanguard's approach.

Not when it seems in the easiest to analyse example that they probably are not only charging the actual costs. If I thought they were then I'd have no ethical issue with it and would recant.

koru

jamesd wrote: »

See the short description of Schedule 19 SDRT on page 5:

"SDRT is also charged where shares of a fund investing in UK equities are redeemed and subsequently re-issued.

The 0.5% Schedule 19 SDRT is levied when investors sell their units/shares back to the fund. This charge can be reduced by a preset ratio if there are more issues than surrenders during a given two-week period, or if a fund invests in exempt assets (such as non- UK equities)."

I'm confused. Does this mean wriggly is right or wrong? Does this quote mean that SDRT is payable on sales of units even if those units are reissued to another investor who wants to buy units (which is what the first paragraph seems to say) or does the second paragraph mean that the fund effectively does not suffer SDRT in this case? The second paragraph seems to be saying that you don't necessarily suffer the full 0.5% SDRT, but only if there are more issues than surrenders during a two-week period. So, if there are 1,000,000 surrenders and 999,000 issues in a two-week period, this seems to be saying that the fund pays SDRT on all 1,000,000 surrenders. If there had been a 998,000 surrenders, it would not have suffered the full SDRT, although the quotation is unclear about whether the fund pays any SDRT on these surrenders.

As far as I can tell from this quote, it seems to mean that even if there are some issues at the same time as redemptions, Vanguard will not necessarily have overcharged for SDRT. Or am I misunderstanding?

jamesd

Perhaps best to start with this story. Then try this HMRC document, though note that it's relatively early and there may be revisions since then. Here's the index page for the later newsletters, which I haven't finished reading though yet.

grey_gym_sock

jamesd wrote: »

Perhaps best to start with this story. Then try this HMRC document, though note that it's relatively early and there may be revisions since then. Here's the index page for the later newsletters, which I haven't finished reading though yet.

now there's some good bedtime reading!

having read the story and the initial HMRC document, i think wriggly is correct, and the 0.5% which vanguard are levying is the best estimate of the SDRT which will be incurred (under current rules - the story says they may be changed, but i take it they haven't yet been).

HMRC make this far harder to understand than it has to be. the short version is that schedule 19 SDRT is charged at 0.5% on the lower of the value of units created and the value of units redeemed (in a fund).

now add in ordinary SDRT, which is charged at 0.5% of the value of new investments bought within the fund.

the total SDRT charged will be equal to 0.5% of the value of units created. because: to the extent that units created are matched by units redeemed, schedule 19 SDRT will apply. and, to the extent that units created exceed units redeemed, there will be more cash within the fund, so it will buy more investments, and ordinary SDRT will apply. QED.

SnowMan

koru wrote: »

I'm confused. Does this mean wriggly is right or wrong? Does this quote mean that SDRT is payable on sales of units even if those units are reissued to another investor who wants to buy units (which is what the first paragraph seems to say) or does the second paragraph mean that the fund effectively does not suffer SDRT in this case? The second paragraph seems to be saying that you don't necessarily suffer the full 0.5% SDRT, but only if there are more issues than surrenders during a two-week period. So, if there are 1,000,000 surrenders and 999,000 issues in a two-week period, this seems to be saying that the fund pays SDRT on all 1,000,000 surrenders. If there had been a 998,000 surrenders, it would not have suffered the full SDRT, although the quotation is unclear about whether the fund pays any SDRT on these surrenders.

As far as I can tell from this quote, it seems to mean that even if there are some issues at the same time as redemptions, Vanguard will not necessarily have overcharged for SDRT. Or am I misunderstanding?

I'm confused also.

I read it to say if the fund is growing and more money is going in than being taken out on a continuous basis, SDRT is payable in buying assets with the net money going in so SDRT = 0.5% x(money in - money out).

In addition there is a second element of 0.5% of money out because the units are being bought back by the manager (can't offset the units being created for the money coming in) so SDRT is 0.5% x money out.

Combining these two gives 0.5% x money in which is what wriggly is saying.

However that is a very specific scenario which obviously can't happen indefinitely.

For a constantly declining fund it appears the SDRT is zero because no units are being issued and the multiplying factor on the surrender side is zero(?).

Just my guess.

koru

SnowMan wrote: »

For a constantly declining fund it appears the SDRT is zero because no units are being issued and the multiplying factor on the surrender side is zero(?).

Just my guess.

I can't reconcile that with the quote from the Vanguard publication. The second paragraph in the quote seems to be saying that if investors sell units in the fund section 19 SDRT will be levied on those redemptions unless the redemptions are exceeded by issues. So, for a constantly declining fund, doesn't this mean full SDRT on the redemptions?

grey_gym_sock

koru wrote: »

I can't reconcile that with the quote from the Vanguard publication. The second paragraph in the quote seems to be saying that if investors sell units in the fund section 19 SDRT will be levied on those redemptions unless the redemptions are exceeded by issues.

that statement is obscure at best ... but the better place to get an accurate statement about this is the HMRC doc (which jamesd also linked to).

rephrasing the HMRC doc without unnecessary complication, schedule 19 SDRT is levied on the lower of redemptions or issues.

HMRC make it over-complex, by saying that it's levied on redemptions (S), not issues (I), but that if issues are lower, then the liability is reduced by a factor of I/S.

in other words:

if redemptions (S) are lower, the liability is: S x 0.5%

if issues (I) are lower the liability is: S x 0.5% x I/S ... which = I x 0.5%

koru

SnowMan wrote: »

For a constantly declining fund it appears the SDRT is zero because no units are being issued and the multiplying factor on the surrender side is zero(?).

The answer seems to be that there would be no section 19 SDRT on any redemptions if there have been no matching issues. But all the units that are being redeemed would have suffered SDRT when they were originally issued. So, the conclusion we seem to be coming to is that the fund will suffer SDRT (ordinary or section 19) on all issues of units whether they are new issues (because the number of units is increasing on a net basis) or they are reissues not requiring any new purchases of underlying shares. Therefore, the Vanguard method of charging 0.5% upfront fee on every purchase of units will precisely match the SDRT that the fund suffers and there will not be any excess.

SnowMan

koru wrote: »

The answer seems to be that there would be no section 19 SDRT on any redemptions if there have been no matching issues. But all the units that are being redeemed would have suffered SDRT when they were originally issued. So, the conclusion we seem to be coming to is that the fund will suffer SDRT (ordinary or section 19) on all issues of units whether they are new issues (because the number of units is increasing on a net basis) or they are reissues not requiring any new purchases of underlying shares. Therefore, the Vanguard method of charging 0.5% upfront fee on every purchase of units will precisely match the SDRT that the fund suffers and there will not be any excess.

You may be right.

I am still not sure I understand how it works, but ignoring the 2 week averaging does it work like in this spreadsheet (which is a fund that starts at zero increases in size and then reduces to zero) so the total stamp duty payable is 85, which is also 0.5% of all subscriptions into the fund, so explains the Vanguard charge?

In the spreadsheet SD is the normal stamp duty payable because there is an excess of money coming in over money going out so stamp duty is paid on buying investments

and schedule 19 SDRT is this strange 0.5% on lower of creations and redemptions.