What is the ongoing charge for Scottish Mortgage Investment Trust?

InvesterJones

Struggling to get a clear answer, as it seems to depend what you're looking at.

The fund factsheet (31/7/24) claims 0.35%: https://www.scottishmortgage.com/api/document-download?bg-url=/en/uk/individual-investors/literature-library/funds/investment-trusts/scottish-mortgage/scottish-mortgage-monthly-factsheet/

The website as of 31/3/24 claims 0.35%: https://www.scottishmortgage.com/en/uk/individual-investors/frequently-asked-questions (scroll to ongoing charges).

The fund key information document (30/6/24) claims 0.82% ongoing, 0.01% transaction: https://docs.publifund.com/kiduk/GB00BLDYK618/en_GB

Some platforms report the former, some the latter. Which is correct?

Linton

In general the published % charges in fund data sheets are calculated from last year's actual values.  I dont know how the data in the  KID is calculated but it does say that the largest component in the charges is the cost of borrowing.  The changes in market interest rates therefore would have a major effect. 

According to the monthly data sheet, borrowing is £1.63B out of £13.7B of assets.  If interest rates are 4.5% that would imply a borrowing %charge of 1.63/13.7 X 4.5%= 0.53% which seems about the right order of magnitude.

Presumably were the borrowings to be less than so would the returns.

Rollinghome

InvesterJones said:

Struggling to get a clear answer, as it seems to depend what you're looking at.

The fund factsheet (31/7/24) claims 0.35%: https://www.scottishmortgage.com/api/document-download?bg-url=/en/uk/individual-investors/literature-library/funds/investment-trusts/scottish-mortgage/scottish-mortgage-monthly-factsheet/

The website as of 31/3/24 claims 0.35%: https://www.scottishmortgage.com/en/uk/individual-investors/frequently-asked-questions (scroll to ongoing charges).

The fund key information document (30/6/24) claims 0.82% ongoing, 0.01% transaction: https://docs.publifund.com/kiduk/GB00BLDYK618/en_GB

Some platforms report the former, some the latter. Which is correct?

It depends. As they say in the notes to the SMT factsheet : "*Ongoing charges as disclosed in the latest Annual Report and Financial Statements. Calculated in accordance with AIC recommendation."

The AIC disputes that the ongoing charge figure should include the costs of interest on gearing, saying that it unfairly distorts the cost of ITs in comparisons with OEICs etc which don't use gearing. You can see how the figures they use, which are provided by Morningstar, are calculated here: https://www.theaic.co.uk/sites/default/files/documents/AICOngoingChargesCalculationMay12.pdf   

The AIC only gives their own lower figure on their website. The argument often made is that borrowing costs should not have to be included because it is not a cost but a benefit as borrowing potentially increases returns. Maybe so, but it also increases risk.

The regulators disagree and for the purposes of the KID the cost of borrowing must be included. The KID format is far from perfect, but does include some basic information that any investor should be aware of.

So you can decide for yourself.  My own view is that the investor should be made aware of the borrowing costs upfront, just as the higher fees to a highly regarded manager are included even though an expensive manager might produce higher returns. The AIC used to also give the charges including any performance fee alongside the OCF but don't do that any more.  I think they should still do that.

Many disagree, but you can get both figures and make of them what you will.

BTW, the majority of my investments are ITs and ETFs.

aroominyork

Linton said:

In general the published % charges in fund data sheets are calculated from last year's actual values.  I dont know how the data in the  KID is calculated but it does say that the largest component in the charges is the cost of borrowing.  The changes in market interest rates therefore would have a major effect. 

According to the monthly data sheet, borrowing is £1.63B out of £13.7B of assets.  If interest rates are 4.5% that would imply a borrowing %charge of 1.63/13.7 X 4.5%= 0.53% which seems about the right order of magnitude.

Presumably were the borrowings to be less than so would the returns.

You're saying that gearing leads to higher returns. Agreed, if the underlying assets are rising by more than the cost of servicing the debt. Not if the underlying assets are falling.

masonic

It's probably more accurate to describe the returns as magnified. Personally I think the cost of borrowing should be included in the ongoing charges figure. Investors can weigh that against getting more exposure to the underlying assets for their buck. That is over and above the extra exposure they get by buying the shares at a discount.

Linton

aroominyork said:

Linton said:

In general the published % charges in fund data sheets are calculated from last year's actual values.  I dont know how the data in the  KID is calculated but it does say that the largest component in the charges is the cost of borrowing.  The changes in market interest rates therefore would have a major effect. 

According to the monthly data sheet, borrowing is £1.63B out of £13.7B of assets.  If interest rates are 4.5% that would imply a borrowing %charge of 1.63/13.7 X 4.5%= 0.53% which seems about the right order of magnitude.

Presumably were the borrowings to be less than so would the returns.

You're saying that gearing leads to higher returns. Agreed, if the underlying assets are rising by more than the cost of servicing the debt. Not if the underlying assets are falling.

Over the past 10 years SMT  has averaged about 16%/year so even at current interest rates a bit of borrowing has been very beneficial for its investors.  Including money borrowed by ITs for reinvestment in their charging statistices is very misleading.  It's not an issue for funds since they cannot borrow.

aroominyork

If you bought SMT three years ago and watched it drop like a stone you would see the gearing as the opposite of beneficial.

masonic

aroominyork said:

If you bought SMT three years ago and watched it drop like a stone you would see the gearing as the opposite of beneficial.

The first rule of investing is understand what you are investing in. The gearing has only been a little over 10%, so an investor needs to factor this in and buy fewer shares to reach their target exposure. That would mean more of their capital deployed into other investments if they were being sensible.

Of course if you first bought 3 years ago and didn't see the risk of recent gains being reversed and didn't take advantage when that happened in the subsequent months, then you probably didn't understand the investment. Without the gearing an investor would have still had to ride out a 45% drop.

I remember there being one or two threads from naïve investors who had essentially built a whole portfolio from BG funds and watched them all tumble. That is unfortunate. I sometimes wonder what became of them and whether they were able to benefit from the more recent upside in at least some of these funds.

InvesterJones

Thanks all. Very useful information. I'm certainly in favour of as much transparency over charges as possible - by all means include a justification of charges then we can make up our own minds.

EthicsGradient

Linton said:

In general the published % charges in fund data sheets are calculated from last year's actual values.  I dont know how the data in the  KID is calculated but it does say that the largest component in the charges is the cost of borrowing.  The changes in market interest rates therefore would have a major effect. 

According to the monthly data sheet, borrowing is £1.63B out of £13.7B of assets.  If interest rates are 4.5% that would imply a borrowing %charge of 1.63/13.7 X 4.5%= 0.53% which seems about the right order of magnitude.

Presumably were the borrowings to be less than so would the returns.

The KID lists the exact cost of borrowing:
" the costs of borrowing money to invest, including interest and arrangement fees (0.46%) but not any income or capital benefit of doing so"