Charges on Fund of Funds

Reluctantpensioner

If I look at a typical fund of funds I see a figure for charges.
E.G. this popular one:
Vanguard LifeStrategy 80% Equity Fund A Acc
Ongoing Charge: 0.22%

But this fund holds other funds, also with a charge.
So the true figure is c. 0.44% as there are charges on all underlying funds?

In this case the active/passive argument becomes a lot more subtle.
With an active fund of active funds the charges would really mount up.

bostonerimus

Reluctantpensioner wrote: »

If I look at a typical fund of funds I see a figure for charges.
E.G. this popular one:
Vanguard LifeStrategy 80% Equity Fund A Acc
Ongoing Charge: 0.22%

But this fund holds other funds, also with a charge.
So the true figure is c. 0.44% as there are charges on all underlying funds?

In this case the active/passive argument becomes a lot more subtle.
With an active fund of active funds the charges would really mount up.

You only pay at the top most level...ie just 0.22% for VLS80

Reluctantpensioner

"You only pay at the top most level...ie just 0.22% for VLS80"
Is that true for all such funds? Or just vanguard?

bowlhead99

Reluctantpensioner wrote: »

"You only pay at the top most level...ie just 0.22% for VLS80"
Is that true for all such funds? Or just vanguard?

What he means is the ongoing charges figure declared by Vanguard to be the ongoing charges of Lifestrategy, includes the ongoing charges of the open-ended investment funds into which Lifestrategy invests in the proportion it holds them, _and_ the charges for running Lifestrategy itself. That's the industry standard way to report it.

So for example, if the blended weighted average fee of Vanguard's UK tracker fund and US tracker fund and Europe tracker fund and Japan tracker fund and emerging markets tracker fund and Asia-ex-Japan fund and various bond tracker funds is something like 0.17%... which you might find yourself exposed to if you bought those individual funds direct... and then the cost of operating the Lifestrategy product as a top level fund that interacts with the investors and allocates the cash down into the different sector trackers is 0.05%; then the total thing is 0.22%; that ongoing charges figures includes both running the Lifestrategy fund and a look-through of the ongoing charges of the underlying funds.

(The split is just a made-up number by me as an example, if you calculated out the proportions and holdings of VLS80 you may find it comes to something quite different to 0.17%).

Likewise if you invest in some other investment firm's multi-manager fund that's unfettered and invests your money with loads of other active managers, you might find the weighted average OCF of that underlying portfolio of other holdings is 0.85% ; and the management fee and operating cost for doing all the research on which managers to invest with and in what proportion and deploying the money accordingly within the top-level fund is 0.5%, then the total OCF they declare is 1.35%. So, the fees have as you say "really mounted up", but they are all included in the ongoing charges figure that you see. They don't just report the 0.5% figure and ignore the 0.85% underneath.

Generally the industry-standard rules they follow in the UK/Europe for presenting an ongoing charges figure on open-ended funds that invest in other open-ended funds, tell them to pick up the underlying fees of the funds in which they invest, and disclose a total in one number.

However, if the investment vehicles into which the fund-of-funds invest are not themselves open-ended funds which publish a simple OCF and are instead for example investment trusts, investment companies, REITs, private investment partnerships etc... the operating costs of those investee vehicles might not be picked up and included. There is usually some sort of note in the prospectus or annual accounts or factsheet etc of a fund-of-funds that gives you a caveat that costs are only included on a look-through basis where available.

In other words, if the person running the top-level fund-of-funds can easily pull the figures out of the underlying factsheets of what is reported to them by their investees, on the exact same basis as the costs they record themselves - which should be the case with all OEICs in which they invest, whether run by the same investment house or a different one... they will include the figure within their own OCF.

BUT, but if their strategy for investing in different asset classes includes investing in a private equity investment partnership or something like (e.g.) British Land, a property holding group structured as a real estate investment trust, they are not going to go and interrogate the financial statements of British Land and pull out all the different types of costs incurred in running it and throw it into their own OCF number to make their OCF bigger. Which is the same as if they invested into Tesco or Google: they are not going to include the costs of getting stock onto the shelves or the electricity bill for running a server farm.

So, a fund-of-fund's cost is a look-through to the extent they are investing in other 'funds', but if they are getting you your exposure to underlying assets by investing in other 'fund-like' things, you will not necessarily get a full look through.

Reluctantpensioner

Thanks for the replies guys.
Very helpful, especially like the extra background info bowlhead.
There are enough scams out there - nobody should be surprised I feared another one.

Just for fun, I ran the numbers with another LifeStrategy fund: VLS60.
OCF is 0.22%. Weighted average of the underlying funds: 0.15%.