Charges on trackers - how do they work?

Jevvers

I have a S&S ISA which is a FTSE all share tracker with Legal and General, in which we have been investing for 12 years.

The TER for charges is 0.56 and there are cheaper trackers out there - eg HSBC with a TER of 0.27%

So as it's the end of the tax year, we could choose to stop paying into L&G and start with a cheaper provider. My question is, will charges continue to be applied to the L&G fund and so erode it?

I realise I don't quite understand how these charges work!

Shaolin_Monkey

Yes the charges are ongoing. With that fund they are a 0.4% annual management charge and additional expenses most recently calculated at 0.16% p.a. They are deducted from income (i.e. dividends paid by the shares the fund holds) and reduce the amount of income paid to unit holders.

Jevvers

Thanks so any idea how to weigh up the risks involved of swapping the units to a new provider vs the ongoing charges?

Shaolin_Monkey

Only risks I can think of in swapping really is if you do an ISA transfer as cash (rather than have the L&G funds transferred 'as stock') then you'll be out of the market during the period of the transfer. You'd then miss out on any market movement during this time. This can work for or against you, depending on what the market does.

jimjames

Jevvers wrote: »

Thanks so any idea how to weigh up the risks involved of swapping the units to a new provider vs the ongoing charges?

There is no risk. You can transfer the ISA to another provider very easily and move to a lower cost fund.

As soon as you do then you will benefit from 50% less charges which will go directly into improving the performance of your investment. You could just start a new ISA in April with a new provider but that would lose any benefit of lower charges on your existing pot.

Assume you've got £20k in L&G (if its in a single fund that might need reviewing but thats another issue!) then your charges are £112. With HSBC they would be £54 per year.

Most people would be very happy to get £58 every year for a one off paperwork filling exercise that may take 10 mins tops.

Perelandra

The TER doesn't always represent the full cost of a tracker- you also need to take into account tracking error if you are making a fine adjustment to fund values:

http://monevator.com/choosing-a-tracker-using-tracking-difference/

However, having had a quick look at the HSBC and L&G FTSE 100 trackers, it does look like the HSBC one would give a slightly higher return (at least since 2008).

Jevvers

Thanks for all the responses. The thing I am concerned about with transferring is that because we have bought units then wouldn't rebuying in another fund wipe out any future benefit from times when we bought into a low market?

So we always invest £300 per month but sometimes that will get us 150 cheaper units (for instance) and sometimes it will get us 100 expensive ones. When the market rises we would gain more on the cheaper units.

If we transfer from L&G wouldn't we be buying in at the current level of the market and so lose any of that advantage of having bought low in the past? I am very happy to be corrected if I have got this wrong!!

Perelandra

No- you'd be selling all your L&G units- effectively taking the profit "now" for all the gains you've made when buying them at a lower price, and then starting again.

You won't end up any worse off- the only risk is that for a short time you *might* be out of market (depending on how quickly the transfer is made), and the market could rise (it could also fall) in that time. If both flavours of the FTSE tracker are available in your existing ISA, this time difference will be very short.

Jevvers

Ok, I'm really sorry but I'm going to need bashing over the head with this one: so I effectively sell all my L&G units, creating a lump sum which I can then use to buy into the market at HSBC. So any gain I have made from pound cost averaging is effectively cashed in at this point (and reinvested)?

If that is right then the risk I'm trying to calculate is that of cashing in all those units which we bought when they were v cheap vs the potential for the market to rise further. We have £60k in there so it's a big deal for us.

jimjames

If your only investment is £60k in a single fund then that is risk in itself as you are so dependent on the fortunes of one market.

The price you paid for the units is totally irrelevant. You are purely moving from one fund to another in the same market - what you paid has no effect on the transaction as you are buying straight back in again not cashing in. Any future rises will be reflected in the new units you buy.

There is a risk if you are out of the market while the sell and buyback takes place but you could do things in the order below to mitigate this:

1) Transfer ISA to new provider in situ, just re-registering the funds with new provider. At this point you will have the same L&G fund but just with the new ISA company.

2) Sell £15k of L&G units & buy back as HSBC
3) 1 week later sell £15k of L&G units & buy back as HSBC
4) 1 week later sell £15k of L&G units & buy back as HSBC
5) 1 week later sell £15k of L&G units & buy back as HSBC
6) You now have all your funds in HSBC

By splitting your transfer across 4 transactions you are spreading the risk of the market changing between the sale and buyback. It is very unlikely that the market would have risen across all the transactions so that should even out and give you around the same value in HSBC units.

But like I say you should also review the holdings as a single country fund is not very diversified.

Jevvers

Riiight, thanks, got it. I now understand about the units and their value.

Next question is: so HSBC doesn't have to be both ISA provider and fund manager? I could buy hsbc's tracker via another ISA provider if I wanted to? (And vice versa?)