Returns from Tracker funds and how to invest in them.

ceblackshaw

I am trying to work out the best was to invest in a tracker fund. Probably the Legal and General FTSE 100 Tracker.

L&G charge .1%. But. Overall charges they quote are .82% (I assume trading etc is in here). Which reduces the overall return to 2.8%.

I considered investing via Hargreave Lansdown as they reduce the fund charge to .06%. They quote a return on 3.5% - but I assume that is gross. The trading costs will be the same as they are still done by L&G so net return will be slightly above the 2.8% quoted by L&G.

BUT. HL charge a platform fee of .45% so overall they will be much less than buying direct.

Is my logic and understanding correct?

AnotherJoe

Start with the fundamentals of what you are investing in.

Which means, FTSE100, very poor choice if it's your only investment.

Second point, nothing special about a tracker fund, again start with what you wish to invest in, then decide if tracker is best for that.

Which makes it a moot point if HL or L&G or anyone else are cheaper to hold this fund.

ceblackshaw

Thanks.
Don't dwell on the investments themselves.
Charges will apply to investments bought direct or via a platform. I am trying to work out the charges.
Selecting an investment can follow; that will be driven by purpose timescales, risk etc
I find the charges are very opaque.

coyrls

There are implicit charges levied by the fund itself, you never explicitly pay these charges, they are deducted from the fund itself. Any fund performance information will be net of these charges and so you don’t need to subtract them again. You can find out these charges by looking for the ongoing charge figure (OCF) for the funds that you are interested in (there are some costs that are not included in the OCF). Note that the OCF will vary between different classes of the same fund and that different classes the same fund will be available on different platforms.

There are also explicit charges levied by the platform on which you choose to hold your funds. There are a myriad of ways in which platforms choose to charge for holding funds; it can be a fixed percentage of your holdings, a percentage that varies by value or a fixed charge. You may or may not be charged for trading and you will probably face some sort of charge if you transfer out of your chosen platform. Which platform is the “best” for you will depend on a number of factors. Here are some resources to help you decide on which platform to choose:

https://www.langcatfinancial.co.uk/product/come-go-served/
http://monevator.com/compare-uk-cheapest-online-brokers/
https://forums.moneysavingexpert.com/discussion/5583030=

ceblackshaw

Thank you very much. Very helpful. I think you confirmed the trading etc charges are paid by the fund - so in my example. HL would pay them as they buy the fund from L&G who incur them.

As an aside I noted "there are some costs that are not included in the OCF" - how does the finance industry continue to get away with that?

I still don't understand how HL can headline a return of 3.5% from an L&G fund that L&G themselves say will be 2.8% after charges. I suspect it is Gross -vs- Net debate but there is no clarity (that i can spot).

Given the platform costs (which may be worth paying, for example, if you have a large portfolio measured by types and/or value) if you are buying a small number of standard products - buying direct is the best approach.

Thanks again.

I'll go and consider what to invest in now.

What I'm trying to do is use my (about to start) State Pension for the next 10 years to pay off the interest only portion of my mortgage. The lowest risk approach would be to convert the whole mortgage to repayment. I thought I may do better to invest, low risk, in stocks (and so get a 2.8% return as opposed to "mortgage interest rate" return (currently about 1%)).

I know I need to watch out for stock market crash as I get close to the end of the period.

Any other comments or observations?

AnotherJoe

ceblackshaw wrote: »

What I'm trying to do is use my (about to start) State Pension for the next 10 years to pay off the interest only portion of my mortgage. The lowest risk approach would be to convert the whole mortgage to repayment. I thought I may do better to invest, low risk, in stocks (and so get a 2.8% return as opposed to "mortgage interest rate" return (currently about 1%)).

I know I need to watch out for stock market crash as I get close to the end of the period.

Any other comments or observations?

FTSE100 is not low risk.

eskbanker

ceblackshaw wrote: »

I thought I may do better to invest, low risk, in stocks (and so get a 2.8% return as opposed to "mortgage interest rate" return (currently about 1%)).

I know I need to watch out for stock market crash as I get close to the end of the period.

Any other comments or observations?

Hopefully you're aware that you won't get a 2.8% return in any meaningful sense - it might average out to be something like that (hopefully better) over the length of an economic cycle (10+ years) but in reality you'll have good double-digit growth years and some negative ones over that sort of duration.

Building on an earlier comment from a previous poster, investing more broadly than a single index is a better bet to minimise risk, as diversification is key. I'd suggest you look at a global multi-asset fund of funds - there are a number of options in the market(including Blackrock, HSBC and L&G) but Vanguard's LifeStrategy range is now available directly from them at a low cost of 0.15%, which is worthy of serious consideration....

coyrls

ceblackshaw wrote: »

Thank you very much. Very helpful. I think you confirmed the trading etc charges are paid by the fund - so in my example. HL would pay them as they buy the fund from L&G who incur them.

[FONT=&quot]There are two ways of understanding what you mean by trading costs. The fund itself will incur trading costs as it buys and sells shares that make up the fund. These trading costs are paid by the fund and not explicitly by you (incidentally this is an example of fund costs that are not captured by the OCF). There also trading costs of you actually buying funds. Depending on the platform you choose, you may or may not be explicitly charged for these trading costs. HL is an example of a platform where you do not pay these trading costs but instead pay a high percentage charge on the value of your funds (0.45%).[/FONT]

ceblackshaw wrote: »

As an aside I noted "there are some costs that are not included in the OCF" - how does the finance industry continue to get away with that?

[FONT=&quot]The important thing to know is that fund performance is quoted net of charges. The FCA have recently produced a report that suggests that funds should provide more data on “hidden” charges.[/FONT]

ceblackshaw wrote: »

I still don't understand how HL can headline a return of 3.5% from an L&G fund that L&G themselves say will be 2.8% after charges. I suspect it is Gross -vs- Net debate but there is no clarity (that i can spot).

I don’t know where you are getting these figures from, so I can’t comment. Perhaps they are quoting performance over different time periods. You can’t rely on either figure as a predictor of future performance.

ceblackshaw wrote: »

Given the platform costs (which may be worth paying, for example, if you have a large portfolio measured by types and/or value) if you are buying a small number of standard products - buying direct is the best approach.

You might think so but that is often not the case. Most people would choose to hold investments within an ISA wrapper and would often want to hold more than one fund across different providers, a platform makes this possible.

ceblackshaw wrote: »

Thanks again.

I'll go and consider what to invest in now.

Well that really is going to be your most important decision and should be made before any other decision. Your initial suggestion of investing only in a FTSE 100 tracker would objectively be a bad decision. You should probably be looking at multi-asset funds made up of either trackers or actively managed. My preference would be for a fund made up of passive trackers but others would have different views.

ceblackshaw wrote: »

What I'm trying to do is use my (about to start) State Pension for the next 10 years to pay off the interest only portion of my mortgage. The lowest risk approach would be to convert the whole mortgage to repayment. I thought I may do better to invest, low risk, in stocks (and so get a 2.8% return as opposed to "mortgage interest rate" return (currently about 1%)).

I know I need to watch out for stock market crash as I get close to the end of the period.

Any other comments or observations?

Yes, do some more research on investments and investment strategies. The Monevator website is a good start.

greatkingrat

Firstly you need to learn the difference between yield and return. The figure of 2.8% quoted on the Legal and General website is the historic yield, not the return. This are the dividends received by the fund during the year.

So if you invested £1000, you would have received £28 of dividends during the last year, which could either be taken as income, or reinvested in buying more units in the fund.

However if share prices fell during the year, your £1000 might only be worth £900 a year later, so even though you have received a +2.8% yield, your overall total return will be negative because you now only have £928 (900+28).

ceblackshaw

Yes - I am aware but always good to be reminded. Once I have sorted charges (think I have done that) and need to work out strategy - 1) shall I take the risk 2) how to spread and mitigate the risk.I've decided to do it so fund selection is probably the issue for 2.

ceblackshaw

Thanks again - yes do understand the difference between yield and return. And the risk of the value crashing is as problem I need to mitigate.