FTSE Tracker vs. Invesco

EdInvestor

Mail on Sunday

The nasty effects of charges....

..the effect can be disastrous on returns. According to Fitzrovia International, an agency that analyses investment costs, a £5,000 investment generating seven% annual returns will grow to £19,348 in 20 years when there are zero costs.In contrast, a TER of one% will reduce the return to £16,036, while a three% TER drags the figure down to only £10,956, meaning the management company has extracted more than £8,000 in charges over the 20 years.

Is there any evidence that actively managed funds are performing better than tracker funds?.The FSA's Clive Briault says no. 'Our research shows there is no evidence, on average, over time, that actively managed funds outperform tracker funds, if you take into account the difference in charges between the two,' he says.

dunstonh

Seeing as Ed is quoting Fitzrovia, lets see what else they say and not just one snippet.

So should I choose a fund which has the lowest charges?
Not necessarily. Charges are just one of the factors to take into account when choosing or assessing a fund's prospects. Some of the best performing funds have higher charges. However, while lower total annual expenses should help a fund achieve consistent performance, high charges are no guarantee of superior performance.

Or how about this from reuters:

Higher-charge funds produce better returns
Chris Duncan

Funds with higher annual management charges reap better returns in volatile investment markets than
those with the lower AMCs, according to research by Standard & Poor's.

In a study across a number of investment sectors over the past five years, S&P found that people who
were willing to invest in funds with the highest AMCs were more likely to get better returns.
In the UK all companies sector, investors with £1,000 in a fund with an AMC of 0.49 per cent or less
received an average return of £1,233 while investors paying 1.5 per cent or above received an average
of £1,384.
In the Japanese sector, investors paying an AMC of 0.49 per cent or less received an average return of
just £870 compared with £1,044 for those paying at least 1.5 per cent.
But although the story remained the same across many other sectors - including North America and
Europe (excluding UK) - returns varied much less with AMCs in the bands between 0.49 per cent and
1.49 per cent and in some cases investors would have benefited from a lower AMC.
In the North American sector, investors paying an AMC between 1 per cent and 1.24 per cent saw an
average return of £1,434 but those paying between 0.5 per cent and 0.74 per cent received £1,472.
However, in all cases, the most expensive bands of between 1.25 per cent and 1.5 per cent or above
substantially outperformed funds with AMCs of 0.49 per cent or lower.
Skandia investment brand manager Phil Morse says: "I think the performance of the more expensive
funds just goes to show why investors are generally happy to pay higher AMCs, especially in volatile

markets which require a stockpicking approach."

Flynn_2

dunstonh wrote:

The figures are typically zero to 5%. The average commission taken by advisers is 1.8%. So, on Inv Perp income, the initial charge would be 1.8% on that basis.

I said the spread might be up to 7% and you said "7%? Are you making up figures as you go along?"

I might well have believed you but the very first one I looked at was Jupiter, one of the fund-managers you recommended earlier, and that was 6.7%. I assume they aren't the highest.

Didn't you know that? Isn't that something a decent advisor/salesman should know?

You are now saying the average commission taken by advisors is 1.8% but it was the spread we were referring to at that point. If you would like to give the impression that the average spread is 1.8% that's a bit naughty isn't it because you know it's nothing of the kind. Your figure for commisssion of 1.8%, if correct, is because some of the big firms recommended by Martin will charge 0% and sell large volumes while many smaller outfits, what you call Old Style won't refund any of that 6.7% front-end charge. The actual spread will be very much more than just the commission.

The IFA will also of course take the annual trail commission typically 0.5%. That will have the effect of increasing year on year so if the investment does as well as the L&G AS tracker the commission to the IFA will be 1.2% pa of the original investment after 10 years.

Put another way, add the annual fees together and the investor will have seen a total of around 8.5% of his original investment go to the saleman as commission and rising each year. If you add what you say is the average front-end commission that's still well over 10% of the original investment going as commission to the IFA alone. He needs to be quite good to justify that doesn't he - and I don't just mean as a salesman.

And of course the commission taken by the salesman is only a small part of the costs to the investor. The take by the fund managers will be very much higher. So don't ignore the charges wouldn't you say?

This is all very new to me and not something I'd thought about before but very interesting - and just a tad worrying.

Can I ask what you did in sales before you became an IFA where you learnt that smoke and mirrors stuff?

savingforoz

Blimey, what a rude reply, Flynn :mad: ! Dunstonh helps a lot of people on this board and is well respected - by all means disagree with somebody who is far more experienced in his field than you, if you must, but please remember Martin's rule about politeness towards other MSE users.

Flynn_2

Ian_W wrote:

but the manager doesn't have a mandate to track the index down and MAY be able to avoid doing so - a tracker can't.

But as I understand it an Allshare unit trust won't be able to get out of the market and into cash will it? They are obliged to stay near fully invested. A tactic used in the past was to not answer the phones to prevent the investors selling.

Ian_W wrote:

I'm also surprised that Flyn says the all share index massively out-performed the FTSE100 index when AFIAK the FTSE 250 far and away outperformed them both!

You seem to agree that it is correct so I'm not sure why you should be surprised that I said it?

The point being that L&G do a FTSE100 and do an Allshare tracker. It's for you to choose. If you choose the FTSE tracker then common sense suggests you compare with other FTSE funds and if you choose the Allshare tracker compare with other Allshare funds. If neither suits choose something else. It's pointless comparing apples with pears.

Suggest you compare any performance over all periods not just one. Yes some of those 350 funds will do better better over the next 10 years but you won't know in advance which one. You won't be able to compare with probably about 200 managed funds that were being sold 10 years ago but were put out of their misery because you'll have trouble finding their figures.

There are around 350 funds currently being sold but if you check only 130 have lasted 10 years. How many of today's 350 funds will be closed down and removed from the performance charts over the next 10 years? How many were there 10 years ago, will Dunston tell us?

This isn't an area I claim to know anything about, I only started looking around last week so you may know much more than me, but I am amazed at the picture being painted by unit-trust salemen aka IFAs that even I can see is distorted.

Flynn_2

savingforoz wrote:

Blimey, what a rude reply, Flynn :mad: ! Dunstonh helps a lot of people on this board and is well respected - by all means disagree with somebody who is far more experienced in his field than you, if you must, but please remember Martin's rule about politeness towards other MSE users.

You are probably right SF and if so I humbly apologise, but I think it is very important that where someone very clearly has a vested interest then what he says should examined quite closely. Isn't that another of Martin's rules?

Where an insurance or unit trust salesman is suggesting that the product he gets huge commission on is infinitely better in all circumstances than another product that he gets very little or no commission on then it's worth looking carefully.

I'm sure Dunston doesn't mind me "feeling the quality" and would think any good advisor would warn investors to do just that. He isn't just an average poster here after all, he's selling a product and of course advertising his services here. I'm sure he's a lovely man.

dunstonh

I might well have believed you but the very first one I looked at was Jupiter, one of the fund-managers you recommended earlier, and that was 6.7%. I assume they aren't the highest.

Typical maximum is 5%. Soft closed funds can be higher. Most are between 3% and 5% and with 3% discounted, you end up at 0%-2% on most of them. The fund in question is not 6.7% but 5.25% with full commission.

Didn't you know that? Isn't that something a decent advisor/salesman should know?

Probably best you get your figures right before you accuse me of that.

You are now saying the average commission taken by advisors is 1.8% but it was the spread we were referring to at that point. If you would like to give the impression that the average spread is 1.8% that's a bit naughty isn't it because you know it's nothing of the kind.

I dont need to give any such impression. The FSA publish the market averages every 6 months. The figures show for collective investments that 1.8% is the average initial commission. The FSA obtain these figures direct from the providers based on business processed in the 6 months before. This figure will appear on every single IFA's "menu" of charges.

Your figure for commisssion of 1.8%, if correct, is because some of the big firms recommended by Martin will charge 0% and sell large volumes while many smaller outfits, what you call Old Style won't refund any of that 6.7% front-end charge. The actual spread will be very much more than just the commission.

Average means some charge more, some charge less. However, I'm a small outfit with just two advisers and 5 introducers but I charge 1%. Whilst you have some discount providers in there, you also have some significantly bigger salesforces in there as well almost certainly taking maximum.

The IFA will also of course take the annual trail commission typically 0.5%. That will have the effect of increasing year on year so if the investment does as well as the L&G AS tracker the commission to the IFA will be 1.2% pa of the original investment after 10 years.

That example I mentioned earlier with a real portfolio I took on in May 2001. The portfolio with me being paid 0.5% trail has grown by 58.35% in that time (up to last review). The HSBC all share tracker has grown by 11.16% in the exact same period.

Paying charges is about getting value for money. His portfolio is 47% higher because he paid my charges and didnt stick with the tracker. Do you think that he cares about the charges difference? Who is happier, the one paying lowest charges and getting 11% or the one paying more charges and getting 58%?

Can I ask what you did in sales before you became an IFA where you learnt that smoke and mirrors stuff?

After studying economics, I joined a bank, then some insurance brokering, then a stint as a tied agent, then I set up my own IFA firm.

If you do the job well, there is no sales.

You are probably right SF and if so I humbly apologise, but I think it is very important that where someone very clearly has a vested interest then what he says should examined quite closely.

I have no problem with that but it does help if you dont accuse me of things by using inaccurate data.

Where an insurance or unit trust salesman is suggesting that the product he gets hugely more commission on is infinitely better than one where he gets very little commission then it's worth looking carefully.

There is no huge difference. I get 1% upfront regardless of wrapper of fund type. Its called a fee. The trail on lower risk funds is often lower than trackers. Some managed funds dont pay trail either. It doesnt stop you using them though.

I see little value in using the FTSE all share or FTSE 100 trackers and I do not apologise for that. I have used FTSE 250 trackers a number of times over the years as they have been better value.

The benefits of the tracker are there in a rising market. They are not there in a volatile or declining market. I see the future as volatile and I make my choice for that reason and I make no apology for that.

I'm sure Dunston doesn't mind me "feeling the quality" and would think any good advisor would warn investors to do just that. He isn't just an average poster here after all, he's selling a product and of course advertising his services here.

I have never advertised and I am not selling anything. I do "promote" the sector allocation investment theory and push diversification and I know that a number of people have done that with companies like HL and Cavendish from their messages they have sent. I have had a few people approach me to give advice or go execution only using me and they have used my services and I have earned from it. The numbers account for less than 2% of my turnover. So, please do not accuse me of selling anything other than the concepts I discuss.

Chrismaths

Flynn, I think you are having a go at someone who has provided you with a wealth of information for no personal gain. Be nice.

Yes, there is a 6.7% spread on Jupiter Sm Cos. The answer to why this is so is key to the difference between OEICs and UTs.

There are 3 main prices associtated with a unit trust - these are bid, creation and offer. Bid is (usually) what you get when you sell. This usually represents the value of all the holdings in the fund on a mark-to-market basis - basically what the underlying holdings are worth if you sell them.

Then there is the offer. This is what you pay for units if you go direct to the manager and includes the initial charge (or to an IFA with no rebate). In this case the initial charge is 5.25% (some or all of which is available as commission to the IFA). If you strip out the initial charge what you are left with is the creation price. This represents the bid value of the shares, + the bid/offer spread of the underlying holdings (which will be large in the case of small caps), and also stamp duty - essentially what it costs to create new units by buying the underlying holdings of the fund.

So if you deal at creation (with no initial charge) there is still a bid/creation spread - in this case 1.38% representing the above. That's not the same as a charge, it's a cost, just like buying the underlying shares. If you buy an OEIC, these deal at a single price. They can be priced in many ways, but the many way uses the "swinging price" method - and all initial charges are made outside the price (so you pay £1 per unit + up to 5.25p initial charge, detailed seperately)

If there is demand for the fund, the price will swing towards the offer price (ie become more expensive), reflecting the fact that the fund has to pay costs to invest the fund, so this avoids disadvantaging people who already own the fund.

Similarly, if more people are selling than buying, the fund will swing towards bid, to protect the remaining investors.

They work out the same, unless you are lucky enough to buy an OEIC at bid, and sell it at offer - but there is no way of knowing this ahead of buying selling.

Frankly, there's no point worrying about the bid/creation spread because if you did it directly, you incur the same costs. On small caps, it will always be large, on larger cap funds, it will be much smaller, as the spreads on large caps are smaller.

si1503

Flynn wrote:

I said the spread might be up to 7% and you said "7%? Are you making up figures as you go along?"

I might well have believed you but the very first one I looked at was Jupiter, one of the fund-managers you recommended earlier, and that was 6.7%. I assume they aren't the highest.

Didn't you know that? Isn't that something a decent advisor/salesman should know?

You are now saying the average commission taken by advisors is 1.8% but it was the spread we were referring to at that point. If you would like to give the impression that the average spread is 1.8% that's a bit naughty isn't it because you know it's nothing of the kind. Your figure for commisssion of 1.8%, if correct, is because some of the big firms recommended by Martin will charge 0% and sell large volumes while many smaller outfits, what you call Old Style won't refund any of that 6.7% front-end charge. The actual spread will be very much more than just the commission.

The IFA will also of course take the annual trail commission typically 0.5%. That will have the effect of increasing year on year so if the investment does as well as the L&G AS tracker the commission to the IFA will be 1.2% pa of the original investment after 10 years.

Put another way, add the annual fees together and the investor will have seen a total of around 8.5% of his original investment go to the saleman as commission and rising each year. If you add what you say is the average front-end commission that's still well over 10% of the original investment going as commission to the IFA alone. He needs to be quite good to justify that doesn't he - and I don't just mean as a salesman.

And of course the commission taken by the salesman is only a small part of the costs to the investor. The take by the fund managers will be very much higher. So don't ignore the charges wouldn't you say?

This is all very new to me and not something I'd thought about before but very interesting - and just a tad worrying.

Can I ask what you did in sales before you became an IFA where you learnt that smoke and mirrors stuff?

That was uncalled for. Dunstonh is one of the most knowledgable guys on here and an asset to this board. His posts are very informative especially for younger less experienced investors such as myself. I'm not saying you can't disagree but keep the crude comments to yourself please.

Back to topic - I'd take a portfolio of top performing UK equity and small companies managed funds over a UK index tracker any day of the week!

jem16

Flynn wrote:

I'm sure Dunston doesn't mind me "feeling the quality" and would think any good advisor would warn investors to do just that. He isn't just an average poster here after all, he's selling a product and of course advertising his services here. I'm sure he's a lovely man.

I have to agree with all the above comments regarding the rudeness of your reply. I'm afraid that your reasons for doing it are neither valid nor pertinent. In all his posts that I have read I have never got the impression that he's advertising his services here nor trying to sell a product.

EdInvestor and Dunstonh hold very different views but manage to conduct their "differences of opinion" in a civil manner.

I have said this before and will repeat it again - if we continue to insult the professionals on this forum they will leave and this forum would be the loser. We need both sides.

Again back to topic;

I would rather pay higher charges for a better return than lower charges for a poor return.