How you pay for the City

cepheus

I love some of the analogies in this Radio programme.

David Grossman investigates the ways that savers, investors and consumers pay for the City, beginning with a look at investment management.

How have the end investors fared after costs? The Investment industry claims we should get around 5% better than inflation. However average costs are 5-6% per year, many people would have received a better return in the building society after tax. Why is this? The fees are too complex, there are too many intermediaries involved in the process helping themselves in different overlapping ways with a simple ISA requiring 16 steps.

There is enormous evidence that active management funds perform worse than passive funds over the long run. Better to use monkeys with pins because they charge peanuts. 'Active' managers are forced to closet index track, churning stocks, selling winners too early and allow losers to run.City managers should get paid for performance not activity.

If the shipping industry had developed along similar lines to the City we would mainly see cargo being loaded between ships with little actually reaching its intended destination, and only the dockers benefiting. :eek:

Lokolo

Hmm I can't really work it out.

The information available to the public shows return after cost. So what is the problem? If you think the costs are too high and the returns too low, then you don't invest in them..

I'm only 7 minutes in but I am struggling to work out what they are getting at. The money goes from Customer to Fund Manager via a Platform, I don't think this is a massive surprise to anyone.

Ark_Welder

A monkey with a pin, picking letters at random, would have produced a less self-contradictory article than the one presented here.

Perhaps we could have a new article entitled 'How you pay for the BBC', starting off with 'How have the viewers (and listeners...) fared after costs?.....'

Lokolo

An investor, over a year, can look at the figures and say how well the fund has done precisely and this is what I may have earned in the building society, bank or another fund.

This is what they said with the proposed changes. But well - you can do that now!

http://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/i/invesco-perpetual-high-income-accumulation/charts

I can see what my return would be, after costs, for that fund over a period of a year. I can also see that my bank savings account would have got me X%.

All I will be able to see in the future is that my fund cost y% before that return. But will that matter?

If a fund returns 10% after cost, but had costs of 7%. Would you pick that over a fund which had returns of 6% with only costs of 1%?

cepheus

Lokolo wrote: »

If a fund returns 10% after cost, but had costs of 7%. Would you pick that over a fund which had returns of 6% with only costs of 1%?

In a comparison of funds in the same sector, one with returns of 12% and costs of 5%, verses a fund with returns of 6% and costs of 1% the second may be better. The costs will stay similar into the future, but any out-performance will probably return to the norm since this was more likely achieved by chance than ability.

cepheus

Ark_Welder wrote: »

A monkey with a pin, picking letters at random, would have produced a less self-contradictory article than the one presented here.

Perhaps we could have a new article entitled 'How you pay for the BBC', starting off with 'How have the viewers (and listeners...) fared after costs?.....'

I could certainly have predicted this response!

lvader

Banks can get money pretty cheaply, why would they pay you about 8%? Banks costs don't even factor here, it's about supply snd demand.

Lokolo

For anyones interested, Gina Miller's "The True Cost" calculator is here

http://www.trueandfaircalculator.com/calculators?type=advanced&refer=index

I did an estimate based on a 0% initial charge (typical with fund supermarkets), 1% AMC (typical after rebate), 50% PTR (typical active), 1% Dealing Charges (typical) and it came to a total cost of 1.57%.

Glen_Clark

cepheus wrote: »

I love some of the analogies in this Radio programme.

Thanks for the link, I have just listened to it all. Although many of us will already know most of the points made I did not think it a waste of time.
It was very well presented. It was also comforting to know I am not the only one who banks profits too early, and holds on to losers for too long in the hope they will come good

Glen_Clark

Lokolo wrote: »

I'm only 7 minutes in but I am struggling to work out what they are getting at. The money goes from Customer to Fund Manager via a Platform, I don't think this is a massive surprise to anyone.

Well perhaps if you listened to the rest of it you might.
If a shop worked like the fund management business (you can't call it an industry because it doesn't generate any wealth) they would charge about 3 times the amount shown on their price tickets. If the dockers worked like the fund managers they would spend all day transferring cargoes backwards and forwards between ships to benefit no one but themselves.

Lokolo

Glen_Clark wrote: »

Well perhaps if you listened to the rest of it you might.

I had, but at the time of writing that post, I was only 7 minutes in. There's no need to be rude now.

If a shop worked like the fund management business (you can't call it an industry because it doesn't generate any wealth) they would charge about 3 times the amount shown on their price tickets. If the dockers worked like the fund managers they would spend all day transferring cargoes backwards and forwards between ships to benefit no one but themselves.

I thought some points were valid, such as the one in your post above. And that some funds are effectively expensive index trackers.

What I don't agree with is the premise that showing the costs will benefit in any way. As I gave an example above, once you know what return you get, why does it matter how much it cost to get there? If you are happy with the end result, you are happy with the end result.

It was said during the show that exposing these costs would be of great benefit

An investor, over a year, can look at the figures and say how well the fund has done precisely and this is what I may have earned in the building society, bank or another fund.

How on earth will that be helpful? We already see the end return of the product, so we can already compare with other funds, with returns from banks and make an informed decision of how to proceed in the future. How is telling us that we got a 9% return over the past year and the costs before that return were y% helpful?