OCF on fund of funds clarification

pjread

Silly question, I've been assuming OCF on a fund of funds (e.g Vanguard lifestrategy funds) is additional on top of 'hidden' OCF's on underlying funds which are factored in to returns, and it isn't a composite/overall OCF including these. Am I right?

I'm getting lazier as I get older, and am wondering if avoiding these by maintaining things myself is really gaining me (say) 0.2% or if I'm mistaken.

bowlhead99

You're mistaken - the 0.22% or whatever it is these days for Lifestrategy includes the costs and fees at underlying fund level plus whatever they charge at the top level.

However, with some FOF structures (eg where you are investing perhaps via investment trusts or similar vehicles into other closed ended vehicles or REITs) it can be quite opaque without a full "drill down" of costs.

Generally the FOF manager will try to give you an OCF which includes the management fees and other costs of his fund and the underlying fund expenses of other collective investment schemes in which he is invested, but will likely exclude holdings in investment trusts, and typically not include performance fees because they're not 'ongoing' charges.

So one I was looking at earlier was (e.g.) 0.45% AMC plus 0 2% other costs to give 0.65% at top fund level, plus 0.44% fees attributable to the funds that the top fund held, for a declared 1.09% OCF... but I know there will be a bit more cost leakage at the lower levels that they don't declare, such as expenses within ITs and some performance fees here and there.

If you looked at something like Blackrock Property Securities Equity Tracker it would say it had a management fee of only 0.2%, producing an OCF of 0.22%., which is coincidentally the same as what the Lifestrategy fund publishes as it's OCF. However, the Blackrock one does not include the operating costs of all the REITs it holds (eg British Land, Land Securities, etc etc). It just treats them as portfolio companies and keeps revaluing them to current market value, without trying to look through at individual lines of costs.

So, you can't always reverse engineer the performance to see what the gross result of the FOF would have been if you could have somehow avoided the fees and expenses of all the underlying entities carrying out their business; but the bottom line is that the performance of those underlying entities is not available without paying their operating costs anyway, so it would be a highly theoretical exercise giving you very little value. IMV as long as you understand whether the OCF includes or excludes underlying costs you will be ok and can compare apples to apples.

EdSwippet

From Vanguard's brochure on LifeStrategy funds:

The annual management charges (AMC) for these funds represent a weighted composite average of the underlying funds, plus a small amount to cover the cost of administering the individual LifeStrategy Fund.

pjread

Awesome so, long story short - generally it works the way I thought, but some may operate the other way and Vanguard LS definitely does?

bowlhead99

pjread wrote: »

Awesome so, long story short - generally it works the way I thought, but some may operate the other way and Vanguard LS definitely does?

No, you said that you thought the OCF published by the fund was on top of all the other "hidden" OCFs of the underlying funds, and was NOT a composite or aggregate figure that included them all.

Generally it works opposite to the way you thought, for most funds you'll come across. ESMA provides regulatory definitions for UCITS and tells them that if a UCITS fund invests a substantial proportion of its assets in other UCITS or collective investment undertakings, its ongoing charges figure shall take account of the ongoing charges incurred in the underlying CIUs. They can use published OCF figures to work it out, or use suitable alternatives or estimations in the absence of published OCFs for the investees, as prescribed by the regulations. So the way the Vanguard funds-of-funds do it is quite standard.

However, some funds or investment companies you invest into may not be UCITS and not covered by the same regulations; and some investments made (particularly into closed ended investment trusts or real estate vehicles) are not required to be "looked through" because they are not themselves considered "collective investment undertakings" even though in substance they allow investors to access a portfolio of underlying assets.

pjread

ahhh ok got you, thanks Bowlhead, much clearer. Not sure how I convinced myself it was the other way around but if regulation pushes them to provide composite OCF that makes everything a lot easier!