OEICs/UT - Questions from a beginner

Lennys_Shinpad

Hi,
I am an investor newbie and am considering about investing in OEICs/UT (I don't fancy Its because I don't really understand them). This is because I would prefer to be a passive investor and don't mind paying charges for somebody to spend the time thinking about each share transaction. I'm still young(ish) and fancy doing something more exciting with my money than filling up my cash ISA allowance every year.

My plan is to dripfeed about £250 a month into (1) a UK tracker, (2) a UK smaller companies fund and (3) something a little more exotic (not sure what yet). I plan to hold these for 5-10 years with minimal swapping of funds. From my research I can see that management charges can really eat into your profits. With this in mind I'm trying to steer clear of anything with an initial cost or annual management charge of more than 1.5%. Before I go ahead and take the plunge I have a few questions:

1 - What is the best place to buy funds? I have been told that funds supermarkets offer the best discounts and was recommended Hargreaves Landsdowne.

2 - How variable are the IC and AMCs? What is to stop the firm upping the AMC whenever they like? As you can tell I am keen to minimise management costs.

3 - If I buy three OEICs in one ISA year, can I easily transfer my funds from one of these investments into another in a later year? If so, what sort of charges would I incur? Although I stated that I want to minimise the swapping of funds, if the AMC increases or the fund under-performs then I will be looking to move my cash.

Any answers or suggestions with my strategy or individual trusts would be most welcome.

Aegis

Lennys_Shinpad wrote: »

Hi,
I am an investor newbie and am considering about investing in OEICs/UT (I don't fancy Its because I don't really understand them). This is because I would prefer to be a passive investor and don't mind paying charges for somebody to spend the time thinking about each share transaction. I'm still young(ish) and fancy doing something more exciting with my money than filling up my cash ISA allowance every year.

Cool so far. For the record, Investment Trusts are basically like Unit Trusts that have shares instead of units, can borrow in order to invest and which can be traded at prices other than the underlying net asset value. Because they're shares rather than units, they can also be traded real time rather than on a forward pricing basis.

My plan is to dripfeed about £250 a month into (1) a UK tracker, (2) a UK smaller companies fund and (3) something a little more exotic (not sure what yet).

Option (1) doesn't fit in with your desire for someone else to think about each share transaction for you. Tracker funds are by definition non-thinking products. They simply follow the index as closely as possible, whether that's a good idea or not. Nothing wrong with the UK sector, I just thought I'd point out that this doesn't necessarily satisfy your requirements.

Option (2) is a little arbitrary, and might not go down so well if the UK Smaller Companies sector continues to perform pretty badly. Still, if you like the odds, it's probably going to work out in the long run.

I plan to hold these for 5-10 years with minimal swapping of funds. From my research I can see that management charges can really eat into your profits. With this in mind I'm trying to steer clear of anything with an initial cost or annual management charge of more than 1.5%.

As food for thought, think about this question: Which would you prefer, a fund with a 1% AMC and a 5% annualised return, or a fund with a 2% AMC and a 10% annualised return?

Essentially what I'm getting at with that question is that charges are not the be all and end all of investing. A lot of the time the higher charged funds genuinely outperform the low-cost funds by enough to offset the increased charges.

Before I go ahead and take the plunge I have a few questions:

1 - What is the best place to buy funds? I have been told that funds supermarkets offer the best discounts and was recommended Hargreaves Landsdowne.

An excellent place to buy active unit trusts and OEICs. Probably not so good for trackers because the discounts will naturally be smaller, and the AMCs may not even be rebated. You might even find that there's a fee to hold them in your account if they don't generate enough commission. Not sure about that though, as I've never bought a tracker.

2 - How variable are the IC and AMCs? What is to stop the firm upping the AMC whenever they like? As you can tell I am keen to minimise management costs.

Not very, from what I've seen. What stops firms from increasing their AMCs is probably the fact that investors would leave in droves for their competitors if they did! There might also be some rules governing the level of charges and how often (and by how much) they can be changed. Not sure about that though

3 - If I buy three OEICs in one ISA year, can I easily transfer my funds from one of these investments into another in a later year? If so, what sort of charges would I incur? Although I stated that I want to minimise the swapping of funds, if the AMC increases or the fund under-performs then I will be looking to move my cash.

Generally HL discount the entire initial cost for the majority of funds. If this is the case, there is no charge for switching from one fund to another that I've managed to find so far.

Lennys_Shinpad

Thanks for your informative reply Aegis.

Reading my post back I think it's clear that I'm not sure about whether I should back a man's judgement through a managed trust or to play it safe(r) and stick to trackers.

I think the main thing I want from my investments is to be able to buy them and (try to) forget about them. With a managed fund I think I'd always have to compare them to a benchmark index and keep an eye out for changes of fund managers. So I will probably opt for a few trackers. There is quite a wide range of iShares with low TERs so I think I'll go for them.

Thanks for your points about ITs and on cost versus fund performance. I'm sure they will come in useful on my journey to financial prosperity (or ruin!).

Aegis

Lennys_Shinpad wrote: »

Thanks for your informative reply Aegis.

Reading my post back I think it's clear that I'm not sure about whether I should back a man's judgement through a managed trust or to play it safe(r) and stick to trackers.

Trackers aren't actually safer than managed funds. If you pick a decent manager, the trackers will actually be a slightly higher risk category than the active fund because the active fund has downside protection. Personally I don't see the advantage of trackers in any of the sectors I invest in, as the managed funds I picked have pretty much always outperformed the index in both bad and good times.

From what I gather, some sectors are better for trackers than others, but the ones I'm in aren't in that list!

I think the main thing I want from my investments is to be able to buy them and (try to) forget about them. With a managed fund I think I'd always have to compare them to a benchmark index and keep an eye out for changes of fund managers. So I will probably opt for a few trackers. There is quite a wide range of iShares with low TERs so I think I'll go for them.

A quick review every 6 months would be enough. If you had, say, 10 funds, that would be at most 30 minutes of research in that time. Since you should spend a while rebalancing each year, if you time the two together you'll barely have any effort to see if the fund manager has changed.

earlgrey_3

Lennys_Shinpad wrote: »

Reading my post back I think it's clear that I'm not sure about whether I should back a man's judgement through a managed trust or to play it safe(r) and stick to trackers.

I think the main thing I want from my investments is to be able to buy them and (try to) forget about them. With a managed fund I think I'd always have to compare them to a benchmark index and keep an eye out for changes of fund managers. So I will probably opt for a few trackers.

Trackers don't have the drag of high management fees and will always be in the top half of the performance leagues. But bear in mind that if you go that way you still have to decide which markets you want to be in. If you go for a FTSE All share tracker you're putting all your eggs in the UK market. Ideal as a core-holding, less good as a sole holding.

If you buy a tracker UT through a fund-supermarket like HL you'll only get a discount on the few over-priced ones that they get the best commission on. On the best performing ones with the lowest charges, around 0.25%, they'll charge you an extra 0.5% p.a. for them in an ISA. On the L&G trackers charging 0.5% management they won't give any discount but won't charge either so could be one of the best bets overall.

For UT trackers alone it might be worth considering buying direct from the fund-managers as you can always transfer it to a fund supermarket when you want to. At least that way you can buy instantly at the level you want without the huge delay you get if you buy via Hargreaves Lansdown and at the same cost.

If you want a one stop fund where the fees are low and you don't need to worry about asset allocation then a global IT might fit the bill - even though charges are creeping up on some of those too. Still nothing as bad as some unit trusts though such as Invesco Perpetual UK Recovery which has an annual management charge of 1.5% and a whopping TER of 3.16% pa.

An interesting graph from Morningstar (but to be fair notice that it doesn't take account of discounts you could get on UTs or dealing costs).


TERs for global ITs from the Assoc of Investment Companies website at http://www.aitc.co.uk/:

Investment Trust Sector TER% (NAV) Performance Related Fee?

Alliance Trust Global Growth 0.34% No
Bankers Investment Trust Global Growth 0.67% No
British Empire Securities & General Trust * Global Growth 0.87% Yes
Brunner Investment Trust Global Growth 0.82% No
Electric and General Investment Trust * Global Growth 1.18% Yes
Foreign & Colonial Investment Trust Global Growth 0.56% No
Gartmore Global Trust Global Growth 1.05% No
Independent Investment Trust Global Growth 0.40% No
JPMorgan Fleming Elect Managed Growth Investment Trust F Global Growth 0.51% No
Law Debenture Corporation Global Growth 0.59% Yes
Martin Currie Portfolio Investment Trust * Global Growth 0.82% Yes
Personal Assets Trust Global Growth 1.13% No
Scottish Investment Trust Global Growth 0.57% No
Scottish Mortgage Investment Trust Global Growth 0.54% No
Second Alliance Trust Global Growth 0.33% No
The Monks Investment Trust Global Growth 0.66% No
The World Trust Fund * Global Growth 1.03% Yes
Tribune Global Trust Global Growth 0.89% Yes
Witan Investment Trust * Global Growth 0.56% Yes
British Assets Trust * Global Growth & Income 0.76% Yes
Murray International Trust * Global Growth & Income 0.92% Yes
Scottish American Investment Co. Global Growth & Income 1.01% No

LongTermLurker

I back Aegis. The first question you should ask is "is it possible/likely for a professional to add value to a product?" I like to think I'm good at my job and they pay me to be good (don't take that as a gloat or anything, I'm just trying to say that skill costs money). If you think it's not possible to add value, then a tracker is cheap. The arguments against trackers include the fact that in 2000 FTSE trackers were forced to buy low-quality technology companies. If an index does well, the tracker will do just as well - if an index crashes, the tracker will nosedive.

Re initial costs, as Aegis says, HL discount almost or all of the IC. So if a fund has a stated IC of 5.5% you might only actually pay 0.25% - 0.5%, so that actually hits the spot as far as your low charges go. HL also rebates a small amount of the AMC, so a stated 1.5% annual charge may be reduced to just 1.25%, which isn't bad IF the UT/OEIC is quality. I'm very much a lover of quality and will happily pay more for Heinz beans because I think they taste better than smartprice; so I am happy to pay someone who has a good reputation.

My thoughts on your choice of Smaller UK Companies is that IF there is a recession or severe downturn, this is exactly the type of company that will be hit hardest. I see smaller companies as quite high risk at the moment.

What hasn't been mentioned is HOW or where you would buy the UTs; if you are only saving into a cash ISA at the moment then make sure that your UTs/OEICs account for the balance of your £7200 annual ISA allowance.

With your £250pm, you could split that between, say a UK Equity Income fund (accumulation - reinvest the income), a general commodities fund (go easy on the %age split) and/or emerging markets (again, take it easy, and consider that commodities funds and emerging markets are tightly linked). Bonds are also being touted as good value at the moment, because high savings rates are keeping the prices down, which makes the returns rise.

Re your question #3, it is dead easy to switch from one fund to another, but it's generally best to let a fund run for the long term in my eyes, rather than trying to switch at the top of your current fund into the trough of a new one - you'lll likely fail and send yourself crazy in the process...

Aegis wrote: »

A quick review every 6 months would be enough. If you had, say, 10 funds, that would be at most 30 minutes of research in that time. Since you should spend a while rebalancing each year, if you time the two together you'll barely have any effort to see if the fund manager has changed.

If you chose funds which are in their "preferred" list, HL will do this bit for you and tell you if a management change occurs.

Before doing anything though, carry out some detailed research at the likes of Hargreaves Lansdown, Trustnet, etc. Good luck.

earlgrey_3

LongTermLurker wrote: »

If an index does well, the tracker will do just as well - if an index crashes, the tracker will nosedive.

Unfortunately so will most managed funds too - as you can see from the performance figures for the last year. What's more some of what were supposed to be the best managers like Jupiter etc did the worst of all. The tracker funds as always were just a little above average.

Aegis

LongTermLurker wrote: »

If you chose funds which are in their "preferred" list, HL will do this bit for you and tell you if a management change occurs.

Before doing anything though, carry out some detailed research at the likes of Hargreaves Lansdown, Trustnet, etc. Good luck.

Only around 1 in 3 of my funds is on the wealth 150 list. I prefer to pick my own selection all in all, but I keep an eye out for management changes by keeping up to date with Citywire articles. Of course, that has a lot of overkill in terms of detail, but because I'm hoping to be an IFA some day, it's all useful information!

LongTermLurker

Aegis wrote: »

Only around 1 in 3 of my funds is on the wealth 150 list. I prefer to pick my own selection all in all

Sorry, I wasn't suggesting specifically going for the Wealth150 funds (though as OP has little current experience to go on, it's a good place to start) but that list strangely enough includes all but one of my chosen UTs & OEICs, so it reduces, rather than eliminates, research time.

dunstonh

trackers don't have the drag of high management fees and will always be in the top half of the performance leagues.

Problem is that stats dont support that comment. I repeat what has often been said before. Look at the UK All companies sector and you will find the FTSE All share trackers consistently around mid table (sometimes just above, sometimes just below). The FTSE 100 trackers have spent most of the last 14 years at or around the bottom of the tables and the FTSE 250 trackers in recent years (until last year) at the top end. The 100 and 250 performances reflected the large/mid cap bias.

Most managed funds in that UK all companies sector are pretty poor anyway but there are some gems but the managed options in the other UK sectors where there is no tracker coverage could offer better potential.