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Moving to drawdown - costs reasonable?

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  • Linton
    Linton Posts: 18,153 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Hung up my suit!
    edited 1 February 2021 at 2:17PM
    There is a justifiably held view that the more you pay in fund fees the worse your returns will be (clearly the association won't be perfect and may not be entirely causal). .........a suitable portfolio, a simple cheap one - so likely to get better returns,
    dunstonh said:
    Some people on this forum focus on cost before investment selection.  ...    Being returns focused or cost-focused is a personal choice.  Cheap doesn't mean better.  Expensive doesn't mean better.  .... 
     Compromising too much on cost can reduce your returns.
    From just this page, and there are others to spin one's head, here are several plausible comments on fees and returns, usually generalisations because the hard truth can be difficult to nail down when it’s either not known (by anyone) or difficult to express at speed in short bites. None of it makes it easier for the enquirer, other than they learn that the area is contested ground layered with uncertainty. Time to get a bit more specific perhaps, with some quotes:

    'Gruber (1996) drew attention to the puzzle that investors buy actively managed equity mutual funds, even though on average such funds underperform index funds. We uncover another puzzling fact about the market for equity mutual funds: Funds with worse before‐fee performance charge higher fees. This negative relation between fees and performance is robust and can be explained as the outcome of strategic fee‐setting by mutual funds in the presence of investors with different degrees of sensitivity to performance.'

    'In this study, we provide extensive evidence on the performance and characteristics of 1,779 U.S. domestic, actively managed retail equity mutual funds. We find that expense ratios differ widely among Morningstar categories. Overall, our results indicate that funds with low expense ratios outperform those with higher expense ratios. ...  Consistent with previous studies, we find strong evidence that the average actively managed mutual fund fails to outperform its benchmark after expenses. Furthermore, the probability of a fund achieving a positive risk-adjusted return increases as its expense ratio decreases.'


    'For example, in U.S. equity funds, the cheapest quintile had a total-return success rate of 62% compared with 48% for the second-cheapest quintile, then 39% for the middle quintile, 30% for the second-priciest quintile, and 20% for the priciest quintile. So, the cheaper the quintile, the better your chances. All told, cheapest-quintile funds were 3 times as likely to succeed as the priciest quintile.'
    These won't be the whole truth, as yet unknown, but they point in a clear direction and allow some useful generalisations to be made to help us make decisions with some confidence.
    In god we trust; all others can bring data.

    To demonstrate opinions can vary.....

    You quote a 1996 study from the US.  UK investing conditions are different to the US.  Tax is different and it seems the style of funds may be different. But also 1996 is very different to now.  In 1996 charges, pre-internet, were much higher partly because advice and platform costs were bundled in, funds being sold on commission and once sold were often directly held with the fund manager. Technology has reduced the costs of doing business,and also the market has changed.  In 1996 most people's experience of funds was through their company pension where the choice was very limited, now there is much more competition.  Thanks to the large decrease in fund manager costs generally, the effect of differences in charges is also much lower.

    On comparision between cheap index funds and more expensive active funds, once you ignore the closet trackers it is very difficult to get a fair comparison.  The underlying investments are different.

    Perhaps you have access to up-to-date data on UK funds?



  • Thrugelmir
    Thrugelmir Posts: 89,546 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Photogenic
    The challenge that retail investors face today is to navigate their way through the bewildering choice of investments available. Cost will be meaningless if the wrong selection(s) are made at the outset.  Just because someone has written a book (with the benefit of hindsight) doesn't mean that it's a roadmap for the future. 

    Fees are cheap as transactional processing services have reduced with the improvements in technology in the past 20 years.  Good research however is increasingly expensive to source. As the cost of preparation needs to be covered. Which results in many smaller investors being very much being left in the dark. Floundering around and generally moving with the herd (safety in numbers).  GameStop is just the tip of an iceberg. Where investing has turned into a game of speculative money making.  One day they'll be a shakedown and result in a lot of burnt fingers as a consequence. 
  • JohnWinder
    JohnWinder Posts: 1,862 Forumite
    Fifth Anniversary 1,000 Posts Name Dropper
    edited 2 February 2021 at 1:54AM
    Linton said:

    You quote a 1996 study from the US.  UK investing conditions are different to the US.  ..... also 1996 is very different to now.  ........
    On comparision between cheap index funds and more expensive active funds, once you ignore the closet trackers it is very difficult to get a fair comparison.
    Perhaps you have access to up-to-date data on UK funds?
    I'm sure you're right to question how generalisable an old US study results are to UK today, but sometimes we don't have much more to go on, reducing our confidence in our current view that in broad terms higher fund fees are associated with poorer returns. But I don't think our concerns about generalisability would reverse that view or even get us to equipoise. But here's a link to the full text of a 2016 study from the USA probably but not explicitly studying US funds: https://www.morningstar.co.uk/uk/news/149421/how-fund-fees-are-the-best-predictor-of-returns.aspx
    'We’ve done this over many years and many fund types, and expense ratios consistently show predictive power. Using expense ratios to choose funds helped in every asset class and in every quintile from 2010 to 2015.'  I don't think Kinnel is comparing cheap index funds with more expensive active funds. In essence, I think Kinnel is reporting that, without distinguishing between active and passive funds, but grouping them together, that the higher the fee the more likely it is that the fund will perform worse that those other funds in the same category eg stocks, or balanced funds, or bonds etc. Worth a read. This link is not behind a paywall as the previous link was, so no worry for anyone trying to keep costs down.
    If this association between cost and return is true is it causal? We might not want to reduce cost if it didn't enhance return; actually we probably would, all else being acceptable, so I don't think we need worry about causality. But it would be good to have a clearer idea about the size of the effect that costs bring to returns.
  • DT2001
    DT2001 Posts: 834 Forumite
    Seventh Anniversary 500 Posts Name Dropper
    Cost of funds is relevant however surely only when comparing like with like. The key for any portfolio is suitable diversity? So it should come after identifying the areas you want to be in.

    If as the OP says these funds are the ‘cream on the cake’ why not use an IFA (do shop around). The level of expertise/knowledge on this forum is good but must come with a reasonable regular time commitment. I feel I would have to make time to research as I would want to ensure the best possible outcome. In lockdown not a problem but in the new normal there are many more time constraints. 

    My IFA saved me money (NI) when I made the 1st payment into my pension (bonus paid on salary sacrifice method) and later that year when George Osborne realigned the pension/tax dates. I wouldn’t necessarily have picked up on the 2nd option myself and so an ongoing relationship worked in my favour.

    IMO the OP needs to decide what they want from the funds and an IFA can help with a plan. The OP could then DIY having just paid for one off advice. Remember it is not an irreversible decision.

    good luck
  • dunstonh
    dunstonh Posts: 119,623 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Combo Breaker
    I'm sure you're right to question how generalisable an old US study results are to UK today, but sometimes we don't have much more to go on, reducing our confidence in our current view that in broad terms higher fund fees are associated with poorer returns. 
    In 1996, the US taxed funds internally.    This put active funds at a massive disadvantage.  I recall some research around the early to mid 2000s that found that after tax, there wasn't one managed fund that beat passive.  However, excluding tax, a good number did beat passive.    The UK does not tax funds internally.

    People often claim that the UK is expensive for investments compared to the UK.  However, that is not necessarily the case.   At the absolute cheapest level, the US can do cheaper due to economies of scale.   However, it can also do more expensive.   I have seen examples that are far more expensive than the UK equivalent.       And since 2013, the UK unbundled charges and this reduced the costs of owning managed funds and increased the costs of owning passive funds (which has historically had a cross-subsidy from the managed funds).

    On a discrete basis, passive funds tend to be around mid table.   So, half the funds above have done better. Half do worse.  The longer you look on a cumulative basis the higher up passive funds tend to move but not always.      One of the issues that the passive biased investors often have is they assume ALL managed funds are bad and it's not possible to filter out the poor quality funds.  That just is not true.   

    Additionally, in some sectors, you have a wider range of managed funds with a  different strategy to the passive fund.  In others, there isn't the variety and there may be more closet trackers.   So, you have to make the decision to go active or passive on a sector by sector basis (sector =  country/region in this case).  
    Most countries do not have very good active funds but the UK does tend to buck the trend. If I was in the US, I wouldn't be using active funds at all.   However, US investors also tend to be very inward looking and stick to US equity.  Whereas UK investors tend to be more global in their investment selections.

    A popular method in the UK is the hybrid of both active and passive.   A core of index trackers with  a number of active satellite funds.  e.g. a UK equity index tracker for your core UK holding but then a managed small/mid cap focused managed fund for your satellite fund.   This can keep your costs down but allow you the best of both worlds.

    For reference, my own portfolio has 14 funds.8 are passive, 6 are managed.  Over the last 3 years, 1 passive fund has been top quartile. 3 have been second quartile. 3 have been 3rd quartile (one is unranked due to the sector it is in).    Of the 6 managed funds, 4 are top quartile, 2 are second quartile.  The portfolio OCF is 0.33%    Why should I give up those higher cost active funds that outperformed passive funds just to bring the OCF down from 0.33% to around 0.15%?   
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • [Deleted User]
    [Deleted User] Posts: 0 Newbie
    1,000 Posts Third Anniversary Name Dropper
    edited 2 February 2021 at 2:04PM
     On a discrete basis, passive funds tend to be around mid table.   So, half the funds above have done better. Half do worse”.

    That’s before fees.  If you take fees into account, passive has consistently outperformed in Europe as well as the US. 
    https://www.funds-europe.com/news/active-vs-passive-which-is-underperforming

    Saying “my active fund outperformed” is neither here nor there. Anecdotes are irrelevant when making investment choices.  Particularly when comparing different assets with different risk levels; then it becomes nonsensical.  Its like saying “for what its worth, I have some Apple stock and it outperformed all my funds”. 

    In general, one should decide what is an appropriate asset allocation. Then select an appropriate investment vehicle that fits it using the following basic principles:

    1. Diversification 
    2. Low costs
    3. Simplicity

  • AlanP_2
    AlanP_2 Posts: 3,517 Forumite
    Part of the Furniture 1,000 Posts Name Dropper
    “ On a discrete basis, passive funds tend to be around mid table.   So, half the funds above have done better. Half do worse”.

    That’s before fees.  If you take fees into account, passive has consistently outperformed in Europe as well as the US. https://www.funds-europe.com/news/active-vs-passive-which-is-underperforming

    Saying “my active fund outperformed” is neither here nor there. Anecdotes are irrelevant when making investment choices.  Particularly when comparing different assets with different risk levels; then it becomes nonsensical.  Its like saying “for what its worth, I have some Apple stock and it outperformed all my funds”. 

    In general, one should decide what is an appropriate asset allocation. Then select an appropriate investment vehicle that fits it using the following basic principles:

    1. Diversification 
    2. Low costs
    3. Simplicity

    So are you of the opinion that only passive investments should be used, for all markets across the globe, and there is no role for active investments in anyone's portfolio?

    Personally the logic behind a hybrid approach makes sense to me, using passives for some markets and active options elsewhere, to achieve the desired asset allocation / diversification and higher than average returns (after costs). 
  • AlanP_2 said:
    “ On a discrete basis, passive funds tend to be around mid table.   So, half the funds above have done better. Half do worse”.

    That’s before fees.  If you take fees into account, passive has consistently outperformed in Europe as well as the US. https://www.funds-europe.com/news/active-vs-passive-which-is-underperforming

    Saying “my active fund outperformed” is neither here nor there. Anecdotes are irrelevant when making investment choices.  Particularly when comparing different assets with different risk levels; then it becomes nonsensical.  Its like saying “for what its worth, I have some Apple stock and it outperformed all my funds”. 

    In general, one should decide what is an appropriate asset allocation. Then select an appropriate investment vehicle that fits it using the following basic principles:

    1. Diversification 
    2. Low costs
    3. Simplicity

    So are you of the opinion that only passive investments should be used, for all markets across the globe, and there is no role for active investments in anyone's portfolio?

    Personally the logic behind a hybrid approach makes sense to me, using passives for some markets and active options elsewhere, to achieve the desired asset allocation / diversification and higher than average returns (after costs). 
    I don’t have anything against “active” per se. As long as the costs are low. Some passive funds or closet funds are expensive - they tend to underperform.  Costs on active funds have been going down, albeit in some countries more than others.  

    There are certain niche asset types where “active” can be a benefit (in my opinion), but not in large cap stocks in developed countries.  And if someone wants to take on more risk and go for the likes of Teslas in a big way, they should just buy companies directly, whether its for your whole fund or play money.  

    Having said all this, I do think that the vast majority of people needing a long term investment / retirement portfolio are very well served with a simple,  multi-asset fund made up of passive funds.  There are major behavioural and stress reducing benefits - among others.    And that trying to beat the market often ends up in tears but for some reason people don’t like to boast about it on message boards.  
  • colmel16
    colmel16 Posts: 40 Forumite
    Eighth Anniversary 10 Posts
    My experience seems similar to your own. I chose the IFA route due to no real understanding of investments. Our "NUMBER" will be covered by SP and 2 small DB pensions. After 3 years of paying 2k+ platform fees and 2k+ adviser fees i took a closer look at what i was getting for my money. Fund provided on the platform was actively managed mainly using low cost products (vangaurd, i shares) and performing under par in my opinion (4%pa) with the IFA only real input was to contact me each year usually when the fund had increased to tell me that in his opinion it was doing well, no advice on savings, tax or other investments. I am now moving to DIY at no cost to transfer  and fees of £240pa platform and fund fees depending on what i choose probably a global multi asset at less than 0.5%. As i see it it will only have to perform average for me to be satisfied i have done the right thing.
  • scdandem
    scdandem Posts: 91 Forumite
    Part of the Furniture 10 Posts Name Dropper Combo Breaker
    colmel16 said:
    My experience seems similar to your own. I chose the IFA route due to no real understanding of investments. Our "NUMBER" will be covered by SP and 2 small DB pensions. After 3 years of paying 2k+ platform fees and 2k+ adviser fees i took a closer look at what i was getting for my money. Fund provided on the platform was actively managed mainly using low cost products (vangaurd, i shares) and performing under par in my opinion (4%pa) with the IFA only real input was to contact me each year usually when the fund had increased to tell me that in his opinion it was doing well, no advice on savings, tax or other investments. I am now moving to DIY at no cost to transfer  and fees of £240pa platform and fund fees depending on what i choose probably a global multi asset at less than 0.5%. As i see it it will only have to perform average for me to be satisfied i have done the right thing.
    That's encouraging, thank you. I'm definitely leaning toward at least exploring DIY. 
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