Funds Investment Decision - TERS

RobStaffs

Do you look at this when investing.Seems most TERS are between 1-1.8%..Is is just the case that the best funds are on the upper level in terms of TER %..?

oldtoolie

What do you mean by best? Over what period of time? And is the best this year always the best next year? Have you looked at the TER of the worst performing funds? They don't say 'past performance is not a prediction of future performance,' for nothing.

RobStaffs

I suppose I have not worded this very well.There seems to be no real option in terms of trying to mininise your exposure to TERS.Trackers are an option but even they have a platform fees on many sites.I have seen some illustrations of how TERS on funds can result in signficant reduction in your earning potential but what is the alternative?

amictus

RobStaffs wrote: »

I suppose I have not worded this very well.There seems to be no real option in terms of trying to mininise your exposure to TERS.Trackers are an option but even they have a platform fees on many sites.I have seen some illustrations of how TERS on funds can result in signficant reduction in your earning potential but what is the alternative?

One option is to accept that you will have some fees to pay (investment companies have to make at least some money) but try and minimise these through choosing index trackers with the lowest TER and a platform with no transaction fees. This approach has led me towards the HSBC index funds (TER ~0.3%) and a provider such as Interactive Investor (no trading fees).

However... after digging a bit deeper, I have discovered that this is only half the story! It seems tracking error (or tracking difference) is really what we should be most concerned about, as this is the real "cost".

http://monevator.com/how-to-use-tracking-error-to-uncover-the-true-cost-of-an-index-tracker/

http://monevator.com/tracking-error-how-to-measure-it/

It seems that cheapest is not necessarily best. If the results on the site linked above are to be believed, then you'd be better off paying a higher TER or platform fees for a lower tracking error. Or, it might even be better to go with an ETF (marginally higher quoted TER and additional trading fees) if it works out that it tracks the index more closely.

One thing I have really struggled with is trying to find consistent data to make my own comparison over any meaningful timespan. Here's the best I could do before giving up!

http://www.trustnet.com/Tools/Charting.aspx?typeCode=FMDFTA,FFSB4,FFPC5,FLGUKIA

(You can add FTSE All Share from the top menu and select reinvest dividends for comparison.)

Not the most helpful post I know, but it's something to consider if you do decide to go down the index tracker route. Perhaps someone can add comments that will help us both out!

RobStaffs

owains wrote: »

One option is to accept that you will have some fees to pay (investment companies have to make at least some money) but try and minimise these through choosing index trackers with the lowest TER and a platform with no transaction fees. This approach has led me towards the HSBC index funds (TER ~0.3%) and a provider such as Interactive Investor (no trading fees).

However... after digging a bit deeper, I have discovered that this is only half the story! It seems tracking error (or tracking difference) is really what we should be most concerned about, as this is the real "cost".

http://monevator.com/how-to-use-tracking-error-to-uncover-the-true-cost-of-an-index-tracker/

http://monevator.com/tracking-error-how-to-measure-it/

It seems that cheapest is not necessarily best. If the results on the site linked above are to be believed, then you'd be better off paying a higher TER or platform fees for a lower tracking error. Or, it might even be better to go with an ETF (marginally higher quoted TER and additional trading fees) if it works out that it tracks the index more closely.

One thing I have really struggled with is trying to find consistent data to make my own comparison over any meaningful timespan. Here's the best I could do before giving up!

http://www.trustnet.com/Tools/Charting.aspx?typeCode=FMDFTA,FFSB4,FFPC5,FLGUKIA

(You can add FTSE All Share from the top menu and select reinvest dividends for comparison.)

Not the most helpful post I know, but it's something to consider if you do decide to go down the index tracker route. Perhaps someone can add comments that will help us both out!

Thank you very much, that is a very helpful post.I tend not to exceed my tax free allowance (5640) pa when it comes to investing.Hence I have tended to stray away from tracker funds as charges and platform fees can be destructive when investing realtively small amounts.I have tracked back on the forum and have noticed big discussion on the whole Active/tracker fund issue.

ManchesterAE1

RobStaffs wrote: »

Thank you very much, that is a very helpful post.I tend not to exceed my tax free allowance (5640) pa when it comes to investing.Hence I have tended to stray away from tracker funds as charges and platform fees can be destructive when investing realtively small amounts.I have tracked back on the forum and have noticed big discussion on the whole Active/tracker fund issue.

Hi Rob,

I would certainly agree that high charges can be a limiting factor in the growth of any investment, but I am of the belief that the underlying investment strategy can be worth the additional premium. As you are probably now aware after reading the two arguments for and against tracker type funds it would seem that the premium demanded by some managers seems worth the additional charge... see for example Cazenove multimanager diversity and Jupiter Merlin Balanced funds... both are examples of long standing funds with High TERs but they seem to offer value for money in that they consistently outperform their relative sectors.

I would say firstly ensure that the fund matches your attitude to risk... then look at a balance of TER/ past performance/growth prospects and finally the platform through which you invest. A fair number of discount brokers out there can help reduce the TERs on those pricey looking actively managed funds as noted above

Good luck and happy trading!

A

pqrdef

RobStaffs wrote: »

Do you look at this when investing.Seems most TERS are between 1-1.8%..Is is just the case that the best funds are on the upper level in terms of TER %..?

It's also being claimed that the cheapest funds consistently outperform the most expensive. You choose.

sorcerer

TERS is only one factor when making a decsion, look at how the fund has preformed against it's peers and see if other better performing funds in the sector have lowers TERS. Sometimes a fund can have a high TERS but actually be the best fund, so it might be worth it. Other times it's just too expensive a bit like Multi-Manager funds.

Reaper

RobStaffs wrote: »

There seems to be no real option in terms of trying to mininise your exposure to TERS....I have seen some illustrations of how TERS on funds can result in signficant reduction in your earning potential but what is the alternative?

You could look at Investment Trusts. Most (though not all) of them have lower TERs. For example compare Edinburgh Investment Trust with Perpertual High Income. Both run by the same manager with the same objectives but the Investment Trust one has a lower TER.

Beware though there are differences. With an investment trust there will be a bid/offer spread (OEICs have an initial charge instead but they can often be avoided) and investment trusts can borrow making them more volatile. There are some other differences too so read up on them if you are tempted.