Stocks & Shares ISAs

dunstonh

In the last week I have tried very hard to locate the other ongoing charges such as transaction charges which are taken on an ongoing basis from my funds.

Remember that this is only a new requirement and not all fund houses and platforms are there yet.

HL don't report the transaction costs on the fund information.

They will do soon. They have to. However, there is a major flaw with transaction costs and despite it being required to disclose, the information is next to useless in its current format.

I have looked at the fund prospectus and is not clear so I have taken to emailing the fund managers and the next step will be the legal ombudsman.

The Legal Ombudsman has no remit over financial services.

In terms of the OCF charges and transaction charges does anyone know how these charges are applied by fund managers. Are they taken from the fund once a year on monthly?

Daily.

RobStaffs

dunstonh wrote: »

Remember that this is only a new requirement and not all fund houses and platforms are there yet.



They will do soon. They have to. However, there is a major flaw with transaction costs and despite it being required to disclose, the information is next to useless in its current format.



The Legal Ombudsman has no remit over financial services.


Daily.

Cheers. Think I got my Ombudsman confused. I have just noticed HL have a "Costs" facility on the site which gives a bit more information on costs. Some of the illustrations are scary in terms of the wedge that the fund managers could take from the funds. All I want is to try to make decisions on as much information as possible. I don't mind paying costs if I get a decent return . Based on your comments I suppose we will never get full disclosure of costs.

bowlhead99

In terms of the OCF charges and transaction charges does anyone know how these charges are applied by fund managers. Are they taken from the fund once a year on monthly?

Daily. But here is a longer reply than you wanted:

The ongoing costs which make up OCF, such as the agreed management fee that has to be paid to the fund manager, or other operating expenses of running the fund like custody, admin and accounting and reporting, legal, etc etc will be accrued pretty evenly throughout the year and built into the NAV each day as the liability for the fund to pay the cost is recognised.

Transaction costs are only going to happen when there are transactions. Say next Monday the fund has £500,000,000 of value and receives a further £100,000 of contributions from investors putting money into the fund at the same time as it has to pay out £89,900 to investors who want to leave the fund. As a result it will be left with £10,100 of spare cash in its bank account to invest, on top of the other net assets of £500,000,000.

To spend the money, the fund manager asks a stockbroker to purchase x shares in CocaCola and y shares in Facebook and z shares in Microsoft. The broker buys shares costing £10,000 but with broker charges to handle the purchases, and foreign exchange commissions, and charges from the bank to make the payment, the total amount that the fund needs to pay is £10,100 and it uses up all the spare money in the bank.

In the fund's bookkeeping / accounting, according to the relevant accounting standards it has to follow, it has just bought a pile of shares and paid £10,100 for them. It doesn't actually record this as a separate 'operating expense' to the fund, it just says it is holding shares that cost £10,100 to acquire. At the end of that day they have to produce an NAV for people to buy in or sell out at on Tuesday, which requires them to say what all the net assets of the fund are worth, and assuming the share prices and exchange rates haven't moved since they bought the shares just before the markets closed, those new assets acquired are only going to be 'worth' £10,000, not £10,100. There is an unrealised loss position between what they paid to get the stocks and what the market says the stocks are now worth. Of course, they might eventually sell them for £15,000 or £50,000 but you have to put a value on it.

So the net assets of the whole fund are now worth £500,010,000 which is a bit less than the £500,010,100 the fund would have if it had been able to invest the 10,100 of new money without incurring any transaction costs, or if it had not bothered to invest the money at all and left it sitting in cash. So the effect of buying the Microsoft and Facebook and Coke shares is that the fund has lost money because aside from paying for the assets, costs have been paid off to an outside party; in your parlance, the manager has taken a big 'wedge' out of the fund, even though the value of those shares on the market have not actually fallen. The transaction costs have implicitly been reflected in that day's NAV, so when you buy in or sell out on Tuesday you will be doing so at a fair price for the assets in the fund, which includes the fact they spent money on transaction costs on Monday.

However, unlike the management fees which are recognised daily in a nice smooth straight line, the transaction costs are not going to happen in an exact straight line. Maybe on Tuesday the fund doesn't actually carry out any transactions so doesn't incure any transaction costs. But the costs on Wednesday and Thursday and Friday are 300 per day so over the week the fund has spent 1000 on these costs. The following week the costs are much lower. The week after that the costs are much much higher because there is more activity from joiners and leavers and also they decide to sell all their BP shares and buy Exxon shares. Over the course of the year perhaps they spend £500,000 of transaction costs (0.1% of fund size) but it is not going to happen evenly each day, it will happen when there are transactions.

Going back to these shares that cost £10,100 to acquire (though were only worth 10,000 at the time). The markets go up nicely and after several years, the fund sells out of some of its major US holdings to buy something else. The particular mix of Microsoft, Coke and Facebook sharea which had originally been worth £10,000 is now worth £20,000. The shares doubled in value. However, when the fund wants to sell the shares, it will again incur broker costs for the trade being placed in the market, fx commissions to get the money back in sterling,etc. So the shares that were apparently 'worth' £20,000 might only result in (say) £19,897 arriving back in the fund's bank account.

So for accounting purposes the fund sells shares for £19,897 of net proceeds, which had originally cost £10,100, and says it has made a gain of £9,797. This represents a nice healthy return on cost of 97% over the course of buying and selling this little package of shares with an original expenditure of £10,100 ; even though in a perfect world where stockbrokers didn't need to be paid, the profit would have been 100% (shares valued at 200,000 which had cost 10,000). The money from the sale goes back to its bank account and that resulting cash plus the rest of the investment portfolio is valued at fair value to give a NAV and daily dealing price for the whole fund. You as an investor can sell out if you wish; you will have been exposed to the transaction costs of sale in 'real time' just like you were exposed to the transaction costs of purchase.

But the fund doesn't have these transaction costs of sale as a seperate line item in its operating expenses, because from a fund operations point of view the transaction costs are dealt with separately from ongoing operating expenses. The overall return to the investor is:

. the fund's realised gains (from buying things for more than they paid for them); plus
. the fund's unrealised gains (from things being worth more than they paid for them although they have not actually been sold just yet); plus
. the income the fund has received from its assets (interest, dividends, property rent etc); less
. the ongoing charges: management fees, admin costs, depositary/custodian, audit, legal etc

As a result of transaction costs the fund's realised gains are lower than they would have been if the buying and selling transactions could have happened without costs, and the fund's unrealised gains are lower than they would have been if the buying transactions could have happened without costs. So when the fund reports its performance it will only be able to claim it got 97% return (if that's what it actually got) and it can be compared against rivals who got 95% or 99% or 99.5%, or 150%, or whatever. However up until now it probably hasn't actually reported an estimation of what amount transaction costs have taken out of the performance that fund would have achieved if the fund had been able to do a deal to buy the Coke and Microsoft and Facebook without a stockbroker to place the deals on the stockmarket and other incidental costs of buying and selling.

RobStaffs wrote: »

CSome of the illustrations are scary in terms of the wedge that the fund managers could take from the funds. All I want is to try to make decisions on as much information as possible. I don't mind paying costs if I get a decent return . Based on your comments I suppose we will never get full disclosure of costs.

There are inherent problems of course with trying to decide if you want a fund based on its transaction costs. In the example above, the fund made a 97% return by deploying the funds into those three particular companies. Some funds might have decided to save costs by not deploying the new money from the investors daily (because they know they would have to return it at some later point anyway), and then they have a transaction cost of zero. But there is an 'opportunity cost' of the idle cash, because the 97% return is never made on that money.

Or let's say Fund A holds shares in IBM, Google and Dr Pepper. To avoid accusations of 'churn' and to avoid having disclosable transaction costs, it keeps them for another year and makes 50% gains with no transaction costs to reduce that figure. While Fund B which does not fear transaction costs decides to spend transaction costs on selling IBM, Google, Dr P by buying Microsoft, Facebook Coke, and then it makes 100% gain with 3% transaction costs to leave 97% gain. Fund B was probably a better choice for the investor. While some investors would be cautious and say that Fund A is clearly a better fund because costs are minimised so if the investment performance is zero, at least they will have lost less money to charges.

It can be very difficult to assess up front whether a fund's transaction costs are fair or appropriate or whether you're willing to pay them. Ideally you would assess them in context, i.e. this fund made big returns and can afford the transaction costs, this other fund made worse returns after lower transaction costs so the transaction cost savings still left you worse off, this other fund made poor returns despite high transaction costs and would have had better returns if it had a lower transaction costs and so on.

If you are going to look at the profile of historic returns to pick your fund (as part of assessing if transaction costs are OK with you) then perhaps you are admitting that the old fashioned way of forming your conclusion on the net returns -which are implicitly net of all costs, charges, gains, losses etc - was fine, whether or not transaction fees are disclosed. If you have reviewed the performance through thick and thin years and like the return, it probably doesn't matter if the transaction cost is marginally higher than some other worse-performing rival. What is useful for the industry is that the increased scrutiny of transaction costs (whether or not it is useful in comparing funds who have different strategies - probably not) is going to make fund managers control costs where they can.

Review of prospective fund costs based on a model provided by the fund manager is good at fund launch or in early years of its operations, as it's good to know what internal 'hurdle' of costs needs to be overcome before you actually start making real net profits, Once thte fund has an actual track record - evidence of how the fund performed in different market conditions net of costs, to compare it to rivals, the costs surely become a lower consideration.

I think running to the ombudsman to say you can't make investment decisions without some transaction cost figure is a bit OTT, especially in the current environment where managers are scrambling to put this data together because it is simply not recorded historically and it's not been needed in previous years. That's not to say we should shy away from bringing managers to account once the regulations are bedded in, if their rivals are doing a better job than them.

dunstonh

RobStaffs wrote: »

Cheers. Think I got my Ombudsman confused. I have just noticed HL have a "Costs" facility on the site which gives a bit more information on costs. Some of the illustrations are scary in terms of the wedge that the fund managers could take from the funds. All I want is to try to make decisions on as much information as possible. I don't mind paying costs if I get a decent return . Based on your comments I suppose we will never get full disclosure of costs.

As it stands, the new charges disclosure is actually flawed and misleading. It gives a false impression of the charges and could display them as more or less.

The OCF is what you actually pay. That is your charge.

The transaction costs are what the fund pays. So, it reduces the returns. However, it is not directly paid by you. The flaw is that say they book a sale at 100p per share. But due to movements, they get 102p per share. That 2p per share is required to be recorded in the transaction costs. So, it lowers the transaction costs disclosure. And in can create a negative transaction charges figure. Equally, if the price was lower on a sale, it increases the transaction charges figure (and you do vice versa for purchases).

So, the transaction costs actually include an element of growth and losses on the investments. Which means a lot of it is not a physical charge.

It was a nice idea to get them included but it has been followed through very badly. Some funds now are able to declare ridiculously low total charges. Whilst others are having to declare ridiculously high total charges because luck went the other way.

dekkard

I'm new to Stocks & Shares ISAs. For Cavendish's ISA, does anyone know if there's a minimum monthly pay in? Can't find this info on their website.

AnotherJoe

I doubt any ISA has a minimum monthly pay in. Only reason for a minimum would be a regular savings amount with lower dealing charges, but you wouldnt have to commit to that.
After all many people would just put the full annual allowance in at the start of the financial year so couldn't add more anyway.
Most would I expect have a minimum starting amount.

A_T

dekkard wrote: »

I'm new to Stocks & Shares ISAs. For Cavendish's ISA, does anyone know if there's a minimum monthly pay in? Can't find this info on their website.

Cavendish is effectively a discounter of Fidelity. I think it's £50 minimum if you set up a regular saver by direct debit

Alexland

A_T wrote: »

Cavendish is effectively a discounter of Fidelity. I think it's £50 minimum if you set up a regular saver by direct debit

I have heard if you ask them nicely they will allow a regular contribution plan at £25 per month.

Or alternatively you could make no regular contribution and stick to lump sums.

A_T

Alexland wrote: »

I have heard if you ask them nicely they will allow a regular contribution plan at £25 per month.

Or alternatively you could make no regular contribution and stick to lump sums.

I seem to recall the minimum lump sum for Fidelity is £800 - but I may be wrong.

Superscrooge

On the Fidelity website under S&S ISA FAQ

What is the minimum amount needed to open an ISA?

You can start a regular savings plan from as little as £50. If you're making a lump sum contribution, you can invest from £1000.

https://www.fidelity.co.uk/stocks-and-shares-isa-faq