Total charges on an investment

peterbennett26

Due to new rules, a company I invest with, BMO Asset Management Limited, is now reporting all the charges made on investments.

I was shocked to see that whilst the gross return was 9.35%, the net return was only 1.66% due to the various costs levied.

These charges broke down as follows

Ongoing costs = 1.41% service costs, 3.17% product costs
Transaction costs = 0.01% service costs, 0.13% product costs
Incidental costs = 2.52% products costs

It totals up as 7.24%, but the cumulative effect is calculated as 7.69%.

It appears that this investment is really earning other people money rather than me, but is this the norm when the true charges on investments are revealed?

Alistair31

Just imagine how bad it would be if the going gets rough and they still take their fees.

Luckily you are at liberty to get out - I hope !

Linton

It is not clear - are you investing in the Bank of Montreal? Or do you have an account with BMO? Or are you buying funds managed by BMO - if so which ones are you talking about? Can you give some specifics?

peterbennett26

I bought these investments many years ago, they were called something else back then, and also the company managing them was different. The fund is now called ICG Enterprise Trust PLC. I think they were in vogue ‘Technology’ shares.

Malthusian

Trustnet shows the OCF as a fairly standard 1.55%.

I suspect you are a victim of "world's worst financial regulation" Mifid. I would be inclined to ignore the nonsensical charge figures and look at how the fund has actually performed in terms of actual share price growth and dividends.

Linton

This is a private equity investment trust that invests in unquoted shares. Its purchases and sales will therefore be by individual negotiations. So you would expect its costs to be much higher than those of a fund that can buy and sell shares in seconds via the computer managed global markets. But as Malthusian suggests, the actual numbers quoted are probably not very meaningful anyway.


The fund has increased 77% in the past 3 years compared with 51% for the FTSE World Index so I dont think you have much to complain about.

lpgm

peterbennett26 wrote: »

I bought these investments many years ago, they were called something else back then, and also the company managing them was different.

"The company managing them" - is this now BMO (perhaps previously F&C)? Is BMO adding extra charges on top of the investment fund's?

dunstonh

Ongoing costs = 1.41% service costs, 3.17% product costs
Transaction costs = 0.01% service costs, 0.13% product costs
Incidental costs = 2.52% products costs

The ongoing cost is the old OCF.
product cost seems unrealistically high. Unless you invested in 2018 and there was an initial charge. Normally you would expect to see that around the 0.2%-0.5% range
Transaction costs are a farce and should be ignored.
Incidental costs. Every example I have seen has been zero except where there is an error. And I have seen multiple errors putting in large figures in that section when they should not be there.

ICG Enterprise Trust PLC.

I have looked at the MiFIDII disclosure figures on FE Analytics and there are some inconsistencies in the data.

ICG Enterprise Trust Plc Ord 10P has an OCF of 1.55% as at 31/01/2018
However, Ongoing Cost Ex-Ante is showing as 3.28%. In most cases the Ongoing Cost Ex-Ante cost is the same as the OCF. However, in funds that invest into niche assets that themselves suffer other costs (like property) then its usual to see the Ongoing Cost Ex-Ante cost higher than the OCF.

This investment is largely a victim of the MIFID II charges farce

Transaction Cost Ex-Ante 0.13% which is fine. (and can be ignored)
Incidental Cost Ex-Ante 2.68%. First one I have seen with incidental charges.

Considering the investment is a high-risk specialist investment, you would expect higher charges. And some of those charges are artificial rather than real.

I was shocked to see that whilst the gross return was 9.35%, the net return was only 1.66% due to the various costs levied.

So, in 2018, it returned 1.66%. 2018 was a negative year. So, this investment made money when most lost money. After charges, it made 3.04% in 2018. 21.21% in 2017, 19.84% in 2016 and 6.32% in 2015.

Seeing it is a high risk specialist investment that would not normally be suitable for most consumers, one assumes you have a bit more knowledge about investing than most. If so, the MIFIDII charges disclosures should not be giving you any concern at all. Although product charge is the one I would be looking at.

Linton

Presumably, as it is a private equity IT, fund staff are actively working with the management of the companies in which it invests. The cost of this would be pretty high. If it isnt in the charges made against the fund who pays?


You see high charges, presumably for similar reasons, with directly investing property funds.

bowlhead99

The trust holds private equity investments, both directly and through other funds (find of find basis) which will themselves be private investment partnerships. Buying a privately held business, or spinning off a part of one, is inherently more expensive than picking a listed stock off a trading screen and asking your broker to buy it.

In addition to its own operating costs (and performance fees which may be charged on a portion of the assets, but which aren't included in OCF as they are subject to a hurdle rate of return), the trust will also be exposed to the operating costs and management fees (including performance fees) of the underlying private funds in which it invests. The latter may not get fully captured in the gross-to-net analysis, because the gross starting point for at least part of the trust's assets may in practice be the net return that the trust can see from that part of its fund portfolio which is run by other managers.

In the last official factsheet at October 2018 (ICG's own website), the portfolio had delivered just over 14% as a gross portfolio return over the first 9 months of their financial year which began in Feb, but this only translated to a 10.8% NAV per share total return (NAV being net of costs and charges).

As the trust is listed on a stock exchange, it is not actually bought and sold at NAV (and the true NAV is not known on a real time basis anyway, as the portfolio valuations will take a period of months to be calculated and published as they are not public listed assets). So the market price for the trust shares can be at a discount or premium to the trust NAV.

For example in the 2018 Q3 factsheet, the 1-year return was shown as 14% on a NAV basis, but only 2% on share price basis, as the discount grew during the period, based on market conditions. While by contrast the 10 year return to October '18 was 180% on share price despite NAV return only being 136%, because the discount narrowed a lot from where it was in the financial crisis.

So-
-private equity investments are costly to buy and hold;
- the sum total of performance fees and carried interest will not be in OCF;
- the full extent of operating costs and fees (including performance fees) may not always be captured in the gross to net analysis either;
- market discount between what you pay to buy the trust and the fair value of its underlying assets will not stay constant, so price return to a shareholder may differ from net NAV return regardless of what the fund 'costs' to run.

Looking at Trustnet, the price total return for the last 1 year to date was 9.2%, and 77% for 3 years, which seems a far cry from the initial complaint that the net after costs was under 2% while fees were eating all the returns. It does depend at what date you choose to cut the data, and the final NAV as of their year end (February) is not yet published.

But the specialist nature of the holdings means that is not the sort of thing that should make you think "ooh, if only I didn't have to pay costs and fees I would quintuple my returns each year". Without the operating costs, management fees and incentive fees, nobody would acquire, improve and sell the businesses, so the gross return wouldn't exist.