Fund of funds hide fees

Legacy_user

Looking into my current fund, it charges its own fees which it is transparent about

But it doesnt tell you about the fees its paying to other funds, which is sapping my return

Why dont they just mimic the funds they invest in and cut out a middleman?

bowlhead99

If it is so easy to just 'mimic the funds they invest in and cut out a middleman', why don't you do the same, and cut out them as a middleman and just hold the underlying funds in the exact proportion that the middleman would choose to hold them?

Of for that matter, why don't you hold the underlying equity or debt instruments that the underlying funds choose to hold, in the exact same proportions, buying and selling at the exact same time on the exact same day?

My guess why you don't do that, is that it would be overly complex, impractical and expensive. So there's your answer.

As to why they don't tell you about expenses such as management fees incurred at the level of the underlying fund, that is unusual, because most do, presenting their expense ratios on a look-through basis.

An exception would be some closed ended investment companies in which I'm invested, which make you aware that their investee holdings are charging fees but simply report the net returns and valuations they get from them.

System

Bowlhead - I will cut one level of management at least, but not go as far as individual stocks. My current fund is only buying a handful of index funds so I don't imagine it'd be too hard for me to do the same. I don't for see any need to completely match it, I.e. I wouldn't bother with the bond part. Getting round to it is just a matter of my next day off to hunt for the best self select isa and switch if I can

If they did tell me it wasn't clear. I suppose it can vary if their balance changes

ColdIron

MatthewAinsworth wrote: »

I don't for see any need to completely match it, I.e. I wouldn't bother with the bond part.

Do you imagine that this would make it a very different fund?

System

Bonds are only about 15% of it, i'm fairly happy with everything else. I could keep the bond even, when my equities get bigger than what's tied up in my mortgage, which is in my view the best bond if I'm going to pay into any

Thinking about it the fee structure needed in self select will depend on the amount, whether a % fee or commission charge makes more sense

Richard_DandR

When I worked in the industry 7 years ago, I used to calculate the look through numbers for fund of funds and they were published in the accounts.

Any in house funds would be waived to avoid double charges.

dunstonh

Richard_DandR wrote: »

When I worked in the industry 7 years ago, I used to calculate the look through numbers for fund of funds and they were published in the accounts.

Any in house funds would be waived to avoid double charges.

Plus, some of the external funds would be obtained on discounted terms because of the size of value that the FoF was investing.

Why dont they just mimic the funds they invest in and cut out a middleman?

The cost involved in that would be astronomical. Plus, it would cease to be an unfettered fund of funds if they did that.

. I don't for see any need to completely match it, I.e. I wouldn't bother with the bond part. Getting round to it is just a matter of my next day off to hunt for the best self select isa and switch if I can

Which would change the risk profile, the asset allocation methodology and impact on the returns because of re balancing errors. So, pretty much, totally changes the outcome.

System

I wonder how big a portfolio would have to be for mimicking to be cheaper, for the commission to be less than the % management fee

Richard - hope mine does that too!

bowlhead99

MatthewAinsworth wrote: »

I wonder how big a portfolio would have to be for mimicking to be cheaper, for the commission to be less than the % management fee

Well, why not tell us what trading commission your transaction-based-fee investment platform of choice charges and how many holdings it holds that you want to mimic? Although you've said that there are some holdings you don't even want, so it's not clear why you're even using this particular FoF.

But as mentioned above, mimicking doesn't work because you don't have the real time information on what funds the fund-of-funds is holding or what companies the underlying funds are holding for you to mimic the holdings as they change. So the point is moot.

In a fund-of-funds you're relying on the research and judgement of the FoF manager to determine what to buy, how much, when, when to rebalance etc. Where are you going to get that information from, if you are not paying for it? Make it up as you go along?

I guess one size at which an equity portfolio is definitely more efficient to use underlying holdings instead of pay management and administration costs is, say, three to five trillion dollars or so. At that point you could just go and buy 10% of all companies in existence around the world and there would be no point in using a manager because you'd pretty much have to allocate the capital among companies in proportion to their market capitalisation in order to fit the cash into the companies without entirely taking any of them over.

You would have liquidity problems picking that much stock up though, so it would still be worth appointing fund managers or investment bankers to engage their contacts in helping to coax people put of their existing holdings to allow you to buy in.

Richard - hope mine does that too!

Assuming it does - and why wouldn't it, given it's market standard practice - the title of the thread "fund of funds hide fees" is somewhat misleading.

Perhaps you could have researched that by reading the documentation, or asked a question about it, rather than just stating that hidden fees were sapping your return, which you now seem to be unsure is actually the case?

System

Bowlhead - in honesty I haven't been charged the fof management fee yet so I don't know if it includes underlying fees, I assumed it didn't as it didn't say it did and I'm not used to things being better than I expected, and if it does subtract underlying fees, I suppose it limits what underlying funds it can invest in

I was looking at the axa self investor, which looks like its 0.35% and no trading fee I could tell, however their own underlying funds they try to push you towards have higher fees. I just liked the underlying funds my FoF chose - a FTSE tracker, an international thingy, a commercial property feeder. I don't dislike the choice of bond fund but its just that while I have a mortgage, that's my bond. So to me that looked like only a few holdings.

I wasn't planning on rebalancing very often. I suppose the FoF will have greater economies of scale - would that help it get better prices?

dunstonh

I haven't been charged the fof management fee yet so I don't know if it includes underlying fees, I assumed it didn't as it didn't say it did and I'm not used to things being better than I expected, and if it does subtract underlying fees,

The fees are deducted within the fund and reflected in the unit price. You are not charged externally (unless you use a platform and have a platform charge to pay)

I was looking at the axa self investor, which looks like its 0.35% and no trading fee I could tell,

AXA have just sold up to Standard Life. They have already said they are looking at pricing and expectation is that prices will go up as Standard Life are more expensive.

however their own underlying funds they try to push you towards have higher fees.

They dont push you towards anything. Platforms are self select.