Ongoing Charge v Ongoing Cost

valiant24

Can anyone explain for me please the difference between Ongoing Charge and Ongoing Costs?
For example in this popular Fund https://www.youinvest.co.uk/market-research/LSE:AGT?tab=11&SecurityToken=E0GBR00R16%5D21%5D0%5DCEEXG%24XLON_4158&Id=E0GBR00R16&ClientFund=0&CurrencyId=GBP&ms-redirect-path=%2F1c6qh1t6k9default.aspx
... the Ongoing Charge is 0.89% but the Ongoing Cost is 2.39%
Thanks
V

bowlhead99

It's a fund-of-funds (an investment company that invests in other funds).   

The ongoing charges including management fee of AVI Global and its operating expenses such as accounting, admin, legal, custody etc are 0.89%. 

As it is geared, there are also borrowing costs, but they are not 'ongoing charges' because they depend on how much is borrowed and would be nothing if there was no borrowing. The gearing should enhance returns in the good times, but would add to overall costs (about 0.29% of the fund's assets as per the latest charges sheet based on their assumptions).

Then they are investing in other people's funds, and those specialist funds in which they invest will also have their own ongoing costs and transaction expenses to which you would be exposed when your money is ultimately investing in the underlying assets through those funds. Per their KID, that adds another 1.21% of costs.

So altogether the 'ongoing costs' to which you're exposed is 1.5% higher than the 'ongoing charges' which are paid by the fund on an ongoing basis for management fee and operating expenses.

valiant24

Thanks that's really interesting, and explains it perfectly.
I hadn't realised that so much was being deducted.  I guess this is unavoidable?

bowlhead99

valiant24 said:

Thanks that's really interesting, and explains it perfectly.
I hadn't realised that so much was being deducted.  I guess this is unavoidable?

You could build the portfolio yourself and directly hold the individual companies and funds that they invest in, and then you wouldn't need to pay the 0.89% management fee and operating expenses of the AGT company, but you would have to identify all the opportunities yourself. And you could invest entirely with your own money rather than with any borrowing / gearing and then you wouldn't need to incur 0.29% of borrowing interest, facility fee or non-utilisation fee on the GBP, EUR and Yen borrowings; but you would have a smaller portfolio from which to get growth or income. Then you would only be exposed to the operating expenses and other charges from the underlying investments which you had picked yourself. 

Worth noting that as of yesterday's declared NAV, at a cost of £9 to buy a share of AGT you are buying a portfolio of assets with a net asset value of more like £10... and that net asset value is made up of the portfolio's gross asset value less the debt, so gross asset value is more than the £10... and some of the assets held by the fund have their own net asset values higher than prevailing market prices for their shares, because they are themselves funds which trade on the stockmarket at a discount to NAV, so the underlying assets even higher than the 'more than the £10'. 

So, while a £9 share of AGT does not actually allow you to personally sell off the underlying assets for 'even higher than, the more than, the £10', because you're buying a whole bag of assets wrapped up in a strategy with management fees and operating expenses and can't control the day-to-day operations yourself... you are earning investment returns from more underlying assets than you have actually paid for yourself. This efficiency and the fact you don't have to do all the research yourself, may more than compensate you for the fees spent.