Ongoing Charges vs Transaction Fees

underground99

Andrew895 said:

I started out wanting to know where the transaction charge comes into play, is it just when you buy or sell units (talking OEICS here, not ETFs or direct shares), or is it charged continuously like the ongoing fee.  

A 'transaction fee' like a broker fee paid *by you* when you ask your broker to buy or sell a share or an ETF on a stock exchange, is just when you are conducting a transaction to buy or sell and the broker's fee structure means he wants to get some money off you for that incremental task he's performing for you.

Fidelity do not charge that type of fixed fee to buy OEICs, they just make enough money from charging you an ongoing percentage-based fee every year (e.g. 0.35% or whatever).

By contrast, the annual 'transaction costs' or 'transaction charges' put on key information documents is a measure of the costs incurred by OEIC itself when the OEIC itself is buying or selling assets within its own portfolio.  It's an ongoing annual measure of a type of cost.

Have a look at the Presale Illustrations Document by clicking a fund and seeing a section marked Important Documents. Click the Presale Illustrations link.  My understanding is that these docs are statutory requirements and should be accurate.

It's calculated following the allowed statutory methods. But some of it is more useful than others.

Scroll down to the last section, Ongoing Charges, and see that the transaction charge is simply added to the ongoing one.  You then add in the Fidelity fee and this gives a total, which is quoted near the start for years 1 3 and 5.  This is why I think you can't ignore the transaction charge - it seems it's actually charged in pounds and pence! 

It isn't 'actually charged in pounds and pence'. The pounds and pence for a given size of investment is a representation of what implicit costs the fund would incur using some assumption of a percentage rate per year of costs for the buying and selling within its portfolio, for a given level of buying and selling that might occur. 

If the fund could have functioned without doing any buying or selling (because it never had any spare money from new investors and never had to sell assets to get money back from departing investors, and never wanted to change its portfolio in any way) it would be zero. As was mentioned in the very first reply at the start of the thread, it is unreliable due to the different methods from which it can be calculated, and some funds can even report negative figures here, even though their service providers aren't sending them any negative invoices.  So most investors are better off focussing on the ongoing charges figure (OCF) as the main measure of the costs to which they're exposed, due to the TCs being a bit unreliable and less comparable between funds, for the various reasons explained in some of the longer posts upthread. 

At the end of the day, if a fund has been inefficient in buying and selling investments over the course of the years, the bottom-line return will be worse than a rival who was more efficient. Particularly with trackers, that effect is more visible (as it comes through in tracking error vs the index or vs rivals). So the TC does not really have massive importance.  If it's a huge number, it would raise questions, but TCs of 0.1% or less are generally neither here nor there. 

Why would Fidelity make their illustration look worse if they didn't need to show it because it was just "internal" to the operation of the fund? 

The FCA likes transparency and regulations tell them they should report it, so they get the figures and report it. The investors seeing the information who know where it comes from because they have read the thread above, may dismiss it as not too important. 

 (I'm looking at iShares 100 UK Equity - I see the the figures don't quite add up: .19 + .35 is .54 though .56 is shown on the first page.  But that might be a rounding peculiarity).

There will always be some roundings when dealing with costs in pennies ; and also as you can see, there is an assumption that the fund goes up in value over time, and for example the Fidelity service fee at 0.35% is coming out at £3.58 rather than £3.50. There will be a compounding effect on some of the costs and what that translates to as reduction in returns. 

Andrew895

Thanks for the info and comments @dunstonh and @underground99 .  So I see the transaction charge is not black and white, and as you are an IFA @dunstonh , I'll take what you say without any pinches of salt!

I suppose I want to know the numerics of all this so I can sort of compare funds, without having a proper understanding of the funds and fund management, because that would take far too long and I'm not that interested.  I am reasonably numerate, so I can (and have) created a spreadsheet to compare funds.  I expect you know the kind of thing, roll up the fund month by month, take off the bid-offer spread in month one, apply the twelfth root of (1+underlying growth rate) each month, deduct the Fidelity fee, ... then it gets tricky, at least for me.  So I had deducted 1/12 of the OCF and TC.

If I use the Fidelity tool to compare funds, it's quite easy to see two tracker funds which are neck and neck. One may have a 5% spread and low charges, the other no spread and higher charges.  My spreadsheet suggests it could take 10 or 15 years for the fund with the spread to catch up, based on deducting OCF and TC.  But I expect it's not as simple as that! And I notice the graph of the B-O spread fund starts at £1000, not 950.

Thanks again for your replies.

underground99

Andrew895 said:

If I use the Fidelity tool to compare funds, it's quite easy to see two tracker funds which are neck and neck. One may have a 5% spread and low charges, the other no spread and higher charges.  My spreadsheet suggests it could take 10 or 15 years for the fund with the spread to catch up, based on deducting OCF and TC.  But I expect it's not as simple as that! And I notice the graph of the B-O spread fund starts at £1000, not 950.

Fund providers will typically provide their performance data on a 'bid to bid' basis, i.e. what you could sell it for now vs what you could sell it for three years ago, which doesn't show a 'cost' of bid offer spread. Some charting tools allow you to select 'offer to bid' basis which would cause a day one drop to 950 from 1000 if there was a 5% spread.

In reality, although the 'retail' classes of some funds will show a 5% initial charge, all the mainstream consumer platforms will generally arrange for their customers to have any initial 5% charge discounted away to nothing. You won't find a tracker fund from any of the big name providers on the major platforms which has a 5% initial charge and makes you pay it, because that would produce a massive shortfall against tracking the underlying result of the index and nobody would buy it when they could buy a rival's fund at 0%.

From time to time there may be some actively managed funds which 'soft close' to new business and want to discourage people from buying them because they don't want to get any bigger. They might introduce a bid-offer spread of some percentage to put off buyers.  That's unlikely to happen with trackers because their business model is to take as much investor money as possible and increase the fund size to become more efficient and improve the performance.

Andrew895

Thanks again @underground99 .  Aaaagh! - all this is quite frustrating!  Following your post above, I've checked back on some iShares US Equity tracker units I bought.  The fund information on fid-ellities site states the prices today are 280.4p buy, and 266.8p sell.  To me it's as clear as day that there's a spread here.  So I calculate what the prices were when I bought - historic prices aren't on the site so I used the growth graphs - and came up with 262.4 / 249.7.  The price I actually got was 250.0, so just as you said, the spread has not been applied. I've spent much time finding alternative funds with no spread to replace the ones I was recommended, a waste it seems.  I've phoned F. to check pricing and they inform me there is a "creation price", and confirm that on the day the prices were 262.5 / 249.7 / 250.0.  I point out there's no mention of creation price anywhere and the chap says he agrees it's frustrating and he'll pass on the point about creation price to someone.  It seems a poor show if F. can't be clear about something as basic as the price of units.  Is this the norm in the industry, would you say?

dunstonh

The fund information on fid-ellities site states the prices today are 280.4p buy, and 266.8p sell.  To me it's as clear as day that there's a spread here. 

 the fund factsheets usually show the full spread if bought direct from the fund house and not necessarily the spread (if any) that applies if you purchase via the platform.

've spent much time finding alternative funds with no spread to replace the ones I was recommended, a waste it seems. 

Probably.

 I point out there's no mention of creation price anywhere and the chap says he agrees it's frustrating and he'll pass on the point about creation price to someone.  It seems a poor show if F. can't be clear about something as basic as the price of units.  Is this the norm in the industry, would you say?

It is a mandatory requirement to disclose the charges that apply to you before you press any submit button on a purchase.

I am not a fan of Fidelity's software but from the intermediary side, they do disclose the actual charges before you press submit and they do confirm the actual purchase price in your contract note.

coyrls

Andrew895 said:

Thanks again @underground99 .  Aaaagh! - all this is quite frustrating!  Following your post above, I've checked back on some iShares US Equity tracker units I bought.  The fund information on fid-ellities site states the prices today are 280.4p buy, and 266.8p sell.  To me it's as clear as day that there's a spread here.  So I calculate what the prices were when I bought - historic prices aren't on the site so I used the growth graphs - and came up with 262.4 / 249.7.  The price I actually got was 250.0, so just as you said, the spread has not been applied. I've spent much time finding alternative funds with no spread to replace the ones I was recommended, a waste it seems.  I've phoned F. to check pricing and they inform me there is a "creation price", and confirm that on the day the prices were 262.5 / 249.7 / 250.0.  I point out there's no mention of creation price anywhere and the chap says he agrees it's frustrating and he'll pass on the point about creation price to someone.  It seems a poor show if F. can't be clear about something as basic as the price of units.  Is this the norm in the industry, would you say?

Are you sure that's not an ETF?  In a previous post you said you were talking about OEICs.

Linton

coyrls said:

Andrew895 said:

Thanks again @underground99 .  Aaaagh! - all this is quite frustrating!  Following your post above, I've checked back on some iShares US Equity tracker units I bought.  The fund information on fid-ellities site states the prices today are 280.4p buy, and 266.8p sell.  To me it's as clear as day that there's a spread here.  So I calculate what the prices were when I bought - historic prices aren't on the site so I used the growth graphs - and came up with 262.4 / 249.7.  The price I actually got was 250.0, so just as you said, the spread has not been applied. I've spent much time finding alternative funds with no spread to replace the ones I was recommended, a waste it seems.  I've phoned F. to check pricing and they inform me there is a "creation price", and confirm that on the day the prices were 262.5 / 249.7 / 250.0.  I point out there's no mention of creation price anywhere and the chap says he agrees it's frustrating and he'll pass on the point about creation price to someone.  It seems a poor show if F. can't be clear about something as basic as the price of units.  Is this the norm in the industry, would you say?

Are you sure that's not an ETF?  In a previous post you said you were talking about OEICs.

There are are iShares OEICs. See https://www.trustnet.com/factsheets/o/g6vm/ishares-us-equity-index-uk-d-acc .

dunstonh

The iShares OEICs are the old Blackrock trackers that were rebranded to iShares several years ago.   They have a lot of different share classes which makes them a bit more complicated.    Retail, clean, super clean, extra super clean, institutional etc

Thrugelmir

Andrew895 said:

Is this the norm in the industry, would you say?

ETF's aren't always as transparent as investors imagine. Seems reasonable that new investors rather than existing cover the costs of the creation of new shares. After all there's an admin cost tp cover,  along with a cost of acquiring the basket of assets. Likewise spreads will open up if investors are redeeming their shares in high volumes. As the investment manager may well be selling the underlying assets into a falling market. While the shares may be tradeable at any time during the markets open hours , doesn't mean that the unit price is constantly aligned with underlying market value. 

coyrls

Linton said:

coyrls said:

Andrew895 said:

Thanks again @underground99 .  Aaaagh! - all this is quite frustrating!  Following your post above, I've checked back on some iShares US Equity tracker units I bought.  The fund information on fid-ellities site states the prices today are 280.4p buy, and 266.8p sell.  To me it's as clear as day that there's a spread here.  So I calculate what the prices were when I bought - historic prices aren't on the site so I used the growth graphs - and came up with 262.4 / 249.7.  The price I actually got was 250.0, so just as you said, the spread has not been applied. I've spent much time finding alternative funds with no spread to replace the ones I was recommended, a waste it seems.  I've phoned F. to check pricing and they inform me there is a "creation price", and confirm that on the day the prices were 262.5 / 249.7 / 250.0.  I point out there's no mention of creation price anywhere and the chap says he agrees it's frustrating and he'll pass on the point about creation price to someone.  It seems a poor show if F. can't be clear about something as basic as the price of units.  Is this the norm in the industry, would you say?

Are you sure that's not an ETF?  In a previous post you said you were talking about OEICs.

There are are iShares OEICs. See https://www.trustnet.com/factsheets/o/g6vm/ishares-us-equity-index-uk-d-acc .

In that case, I'm confused about why you are seeing a spread and that a "creation price" is being quoted.