Investment fees shakeup?

Pincher

I wish Vanguard would get on with it.

Let's see what happens to charges when you can forget about platforms.

I hear the streets of Houston was full of abandoned exotic pets when oil price dived, something like 30 years ago. I'm hoping to see homeless fund managers when Vanguard goes retail in the UK.

Dirk Bogarde in Modesty Blaise, crawling in the desert, moaning: "champagne..., champagne....."

bigadaj

darkidoe wrote: »

Wouldn't the performance advertised be before any charges are applied??

No they should be net for accurate comparison and normally are.

The complication comes about in determining what are true expenses and what are fees and charges that the fund manager benefits from, it should be simple but is often as clear as mud.

One example might be stock lending, fund manager lends out shares owned by his clients but pockets the fee, there is of course argument about the true effect of this on the actual share owners.

Similarly a range of other fees and charges aren't transparently stated.

Linton

darkidoe wrote: »

Wouldn't the performance advertised be before any charges are applied??

No, that is the point. Published performance is based on the unit price with reinvested dividends/interest. Fund charges aren't an extra you pay, the price already includes them.

The only extra charges are for advice and the platform.

talexuser

Linton wrote: »

Why????

I measure an active fund success as a choice against the nearest tracker I would have chosen instead. Not perfect and not scientific, but I'm happy with it after over 30 years of ISAs. One factor in the equation of possible future success are the charges, particularly performance fees, since past performance cannot guarantee anything so performance after charges is only an indicator of possible future success in justifying the charges. I would say the higher the charges the more likely a fund will not prove to be value because of the drag on performance if the strategy fails. If the TER is not telling me the real total charges I would want transparency to make my choice of fund knowing what profits may be spent on. Saying charges are in a performance graph sort of gives the impression that a performance graph is all you need to make an active fund choice.

bowlhead99

talexuser wrote: »

I measure an active fund success as a choice against the nearest tracker I would have chosen instead.

Presumably you wouldn't have chosen an active fund anyway if there was a suitable equivalent tracker. The active funds are quite deliberately not trying to deliver the result of a tracker. In any one period you would not expect them to be the same as a tracker, and if they are worse than the tracker you think they should have beaten, it's irrelevant unless they are worse every year.

One factor in the equation of possible future success are the charges, particularly performance fees, since past performance cannot guarantee anything so performance after charges is only an indicator of possible future success in justifying the charges.

Past performance indicates whether the charges they charged were justified by the performance they performed. Track record (after fees) across a range of market and economic conditions indicates, without certainty, how they may be able to perform in the future.

I would say the higher the charges the more likely a fund will not prove to be value because of the drag on performance if the strategy fails.

In the example of a type of fees that you gave above, i.e. "particularly performance fees", such fees are not a drag on performance when the strategy fails, because they are not charged when the strategy fails, only when the strategy succeeds.

Clearly of course, you should review the criteria on which a performance fee is allowed to be taken, before agreeing to pay a manager a performance fee, as some have tougher criteria than others

If the TER is not telling me the real total charges I would want transparency to make my choice of fund knowing what profits may be spent on.

Nearly all funds tell you what the gross profits have been spent on: the gross profits are spent on fees (which are quantified) to give you the net profit you receive as a distribution or reinvestment.

The quantification is expressed as OCF these days as a better measure than TER). If they have a performance fee, that will not be in the OCF but explained alongside it (the rate and the rules) and the actual amount in pounds for the various historic periods will be in the accounts.

Perhaps what you are alluding to, is the fact that the gross profits could have been higher if the fund had been able to acquire its holdings of shares and other investments without paying stamp duty or broker commissions. Then they would have a lower investment cost to set against their sales proceeds or quarter-end fair value of the investment portfolio , and they would have made more gross profit with which to pay operating expenses and management fees and investor distributions or reinvestment.

However it is not possible for the fund to acquire investments, incur those stamp duties and broker commissions, and produce their NAVs *without* them feeding through to the bottom line performance. There is nowhere to hide them.

If the fund starts with 100 cash and spends it on 99 of investments and 0.5 stamp duty and 0.5 broker costs, and then it earns 3 of dividend income out of which it pays 1 of OCF and gives 2 to the investor as income distribution at the end of the year, and the remaining investments are worth 198 at the end of the year... they will say they have delivered 98 unrealized gains and 2 in your pocket for 100% total return on the 100 invested.

If instead the investments only create 2 dividend income out of which they pay 1 OCF and give 1 to the investor at the end of this year, and the remaining investments are only worth 49 at the end of the year..
they will say the investor has 51 of unrealized losses and 1 income in his hand for a negative 50% total return on the 100 invested.

If the "appropriate index fund" such that there is one, returns under 100% in the first example, then you can say that the combination of investment returns and fees of the active fund beat the combination of investment returns and fees of the passive fund in that situation. Alternatively if the index fund lost less than 50% in the second example, you can say that the combination of investment returns and fees of the active fund failed to perform as well as the index.

But you can make those statements whether or not you know what is being spent on OCF or other investment costs, because the return you see - the difference between what you put in and what it's all worth - is the return of all investment performance net of every type of cost and fee.

Saying charges are in a performance graph sort of gives the impression that a performance graph is all you need to make an active fund choice.

The performance graph for a fund over the last decade or two will show you exactly how the fund performed in all of those different market conditions in terms of return and volatility, after taking into account every single type of cost or expense.

Once you have already decided you might be willing to pay higher fees for different performance, it makes sense to see what those combinations of performance and fees actually translate into, as a total net return.

It doesn't make a lot of sense to see what the manager's performance might have been if there weren't any fees or transaction costs or expenses, because the manager is not trying to sell you his performance without the fees and costs. He is trying to sell you his performance net of the fees he charges and the costs that the fund incurs.

SallyG

"Charges obviously matter but are visible if you want to look" - where are they visible Jim? Maybe it's different for investing outside a pension .....as far as my pension fund goes I can see what the pension provider removes from my fund each month but the amount the fund managers take is already deducted from the unit price - so their take is hidden and looks like the ups and downs of the market - why can't the charges made by fund managers be shown alongside the unit price- it must be on their screens - why not just tell us?

Thrugelmir

Pincher wrote: »

I wish Vanguard would get on with it.

Let's see what happens to charges when you can forget about platforms.

Perhaps Vanguard aren't whiter than white. Hence the grumbling.

talexuser

bowlhead99 wrote: »

Presumably you wouldn't have chosen an active fund anyway if there was a suitable equivalent tracker.

Only if there were no actives that didn't have a chance of outperforming, I like to gamble on finding the active fund that will beat a (nearest) tracker. In fact for 25+years until relatively recently I was never in a tracker, and even now trackers are still a minority and only there to prevent too much duplication.

Since I don't like approaching 50k in any one fund I might want 2 funds in the same area (hopefully without too much overlap in their contents). The managers history then becomes important plus I would wish transparency on the fees if the TER does not tell the entire story. If 2 active choices are a very close call, then fees come into the equation, and if the TER is not telling the whole picture that might give the wrong impression as to likelihood of future outperformance.

Pincher

Thrugelmir wrote: »

Perhaps Vanguard aren't whiter than white. Hence the grumbling.

The next ISA window is April 2017.

Whether Vanguard is white, black, grey or pink, I will put £20k in, suck it and see.

Don't know why I bother, Donald Trump will trigger a nuclear war anyway. When I say a crash in 2018, I didn't expect Armageddon, but I think a few bars of gold next time it dips is a pretty good idea.

Thrugelmir

Pincher wrote: »

Donald Trump will trigger a nuclear war anyway.

Unlikely. Probably the least military expansionist US President for a while.