Fund of Funds TER - Possibly Stupid Question

f_of_f

Hello,

I've tried to use the search function in these forums to find an answer, but without success. And when I speak to my pension providers' helplines they seem a little uncertain too.

I'm investing in a mix of equity, bond and property assets for my pension, and am going down the passive investing route. I have a choice - either select eight or nine funds and ETFs that can deliver the right mix, or go for a 'Fund of Funds' for some or all of those asset classes.

I know the TER for the individual funds - for argument's sake let's say it's 1%pa.

I can also find the TER for the Fund of Funds - let's also imagine it's 1% pa.

But does the Fund of Funds TER represent the overall cost of both that wrapper and the underlying funds, or only the cost of running the Fund of Funds itself (i.e. making sure the asset allocation within remains consistent). I.e. is my 'true' TER 1% or 2% pa?

I really am confused!

Lokolo

I am a little confused as to, if you are going passive, the point of Funds of Funds unless you are looking at a portfolio type fund of funds (so you have a global fund which consists of a FTSE tracker, emerging market tracker) etc.

But to answer your query, I believe the TER includes the cost of the individual funds.

f_of_f

Don't worry, I confuse myself on a regular basis!

There are a handful of funds within my unloved Standard Life employer pension that provide a basket of passive funds, such as this one (okay, I'm a new user so can't post links but have a look at 'CCHD' in the adviserzone website). I'm stuck with some of my pension savings being in the relatively expensive SL scheme as my employer won't send pension money elsewhere, although I put most of my other money into trackers and other assets through a SIPP.

In this instance, if the mix of assets within the 'passive plus' broadly matches my needs, it would be easier to put my savings into that fund of funds rather than having to regularly rebalance my portfolio.

Hope that makes sense.

dunstonh

Fund of funds tend to use the institutional version or clean version of the fund. Not the retail version. So you are not getting the FoF charge and the retail charge of the underlying funds.

thelawnet

Lokolo wrote: »

I am a little confused as to, if you are going passive, the point of Funds of Funds unless you are looking at a portfolio type fund of funds (so you have a global fund which consists of a FTSE tracker, emerging market tracker) etc.

But to answer your query, I believe the TER includes the cost of the individual funds.

It seems a little complicated tbh.

This says no:

http://www.telegraph.co.uk/finance/personalfinance/investing/7923367/More-than-meets-the-eye-to-fund-charges.html

"the TER is misleading because it is not total – it does not include dealing charges or, if it's a fund of funds, the charges on the underlying funds"

If you look at this report:

http://www.fundslibrary.co.uk/fundslibrary.dataretrieval/Documents.aspx?type=packet_fund_doc_reports_and_accounts&user=hl_web_test&sedol=3203312

on a FoF, you will see:

AMC - 1%
Trust fees - 0.03%
Expense on Underlying investments - 0.69%

Total = 1.72%

It adds 'The synthetic TER of the Trust includes the TER of the underlying funds weighted on the basis of their investment proportion.'

In the Factsheet you find:

'Other charges include the Annual Management Charges and Total Expense Ratio (TER) of the underlying fund managers as well as the other fees of the fund itself. This figure may vary, but is correct as at 31.03.11'

http://www.fundslibrary.co.uk/fundslibrary.dataretrieval/Documents.aspx?sedol=3203312&type=packet_fund_class_doc_simplified_prospectus&user=hl_web_test

If you look at the underlying investments, you see:

Artemis Income 20.3%
Threadneedle UK Equity Alpha Income 12.6%
JOH UK Equity Income 12.1%
Invesco Perpetual Income 11.2%
InvPerp High Income 10.7%
PSigma Income 9.8%
CF Walker Crips Equity Income 6.7%
Marlborough MultiCap Income 5.0%
Jupiter Income 3.4%
First State Asian Equity Plus 2.7%
GLG Japan Core Alpha 2.6%
Newton Global Higher Income 2.6%

Looking at costs/AMCs, they all charge 1.5% AMC, except JOH, which charges 1.25%. On top of that there is additional expenses in the TER of 0.05%-0.16%. The institutional funds have similar TER costs, but only 0.75% AMC.

What can we conclude? Well, the AMC is a con perpetrated to enrich Hargreaves Lansdown and Financial Advisors, at the expense of investors.

The weighted average of TER minus AMC is 0.12%, this is 0.57% less than the 0.69% Hargreaves Lansdown quote as the TER of the underlying funds, and suggests that they receive almost all of the Annual Management Charge supposedly due to the Fund Manager's skill and judgement, with the Fund Manager languishing on 0.5% typically, but in a few cases perhaps 0.75%.

For the funds held here, the 'discount' on the AMC is 0-0.25%. If you bought the investments yourself, receiving the HL discount, the cost would be 1.46%, so they are essentially costing only 1% - 0.15% discount + 0.69% - 1.46%+0.03% trust fees= 0.11% to choose your funds for you. Which is entirely negligible to be frank.

Other FoFs will differ, DYOR, YMMV.

thelawnet

dunstonh wrote: »

Fund of funds tend to use the institutional version or clean version of the fund. Not the retail version. So you are not getting the FoF charge and the retail charge of the underlying funds.

I believe HL are using the retail funds, but only because they pocket more of the money than they would if they used institutional.

thelawnet

thelawnet wrote: »

For the funds held here, the 'discount' on the AMC is 0-0.25%. If you bought the investments yourself, receiving the HL discount, the cost would be 1.46%, so they are essentially costing only 1% - 0.15% discount + 0.69% - 1.46%+0.03% trust fees= 0.11% to choose your funds for you. Which is entirely negligible to be frank.

Incidentally, in a SIPP or Junior ISA, where HL don't offer any fraudulent 'discount', but keep all the money for themselves, the cost works out very slightly higher, comparing buying the underlying holdings with the FoFs, that's because for these particular funds the weighted average discount is 0.13%, whereas the discount offered by HL on the FoFs is 0.15%, so the extra cost to hold the FoFs is 0.13% inside a SIPP or Junior ISA.

Either way it's really not all that expensive.

pqrdef

thelawnet wrote: »

What can we conclude? Well, the AMC is a con perpetrated to enrich Hargreaves Lansdown and Financial Advisors, at the expense of investors.

For the sake of argument, suppose time costs £50 an hour. If an hour is spent mucking about with a £1000 holding, the value of the time is 5% of the value of the holding. If the sum of money involved is £1m, the same hour only costs 0.005%.

So when costs are turned into percentages, it's inevitable that they'll be heavily concentrated at the retail end, where the sums involved are smallest.

But it'll still be the fund managers ordering the expensive champagne at the Fat Duck.

thelawnet

pqrdef wrote: »

For the sake of argument, suppose time costs £50 an hour. If an hour is spent mucking about with a £1000 holding, the value of the time is 5% of the value of the holding. If the sum of money involved is £1m, the same hour only costs 0.005%.

So when costs are turned into percentages, it's inevitable that they'll be heavily concentrated at the retail end, where the sums involved are smallest.

But it'll still be the fund managers ordering the expensive champagne at the Fat Duck.

Well I wasn't really targetting advisors here. As you rightly note, historically the advisor would get a small chunk of the investment in return for mucking about with the client's money. Which, while not necessarily in the client's interests, was often proportionate to the amount of work they did.

In the case of Hargreaves Lansdown, however, they don't do anything, but they still pocket the money. And since it is a percentage of the whole lot, they will be right there on the next table.....

Of course HL do have costs, promoting their commission-earning funds, mostly, in the form of endless junk mail. But it's monkey work, and not comparable to individual (somewhat) skilled advice offered by trained advisors. What do they do for me that has a high cost basis? Nothing. Sending letters, buying and selling funds, etc., all have very low costs.