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Fund of Funds = double the charges?

edited 30 November -1 at 1:00AM in Savings & Investments
19 replies 1.1K views
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  • Lokolo wrote: »
    But you don't need to know what the underlying funds cost, it's all calculated and shown in the overall fund cost.

    How do you know that isn't just the charge on only the "Fund" of funds?

    The only one I've found which gives me clarity is Legal General Multi Index 7 which says on the KIID:
    " This Fund's ongoing charges include any charges made by any other
    funds it may invest in. They exclude portfolio transaction costs"
  • LokoloLokolo Forumite
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    How do you know that isn't just the charge on only the "Fund" of funds?

    The only one I've found which gives me clarity is Legal General Multi Index 7 which says on the KIID:
    " This Fund's ongoing charges include any charges made by any other
    funds it may invest in. They exclude portfolio transaction costs"

    The fund costs are a universal, and the standards are set across the industry. They have to include it.

    What you're saying is like Asda including VAT in their prices, but Sainsburys not, but not telling you.
  • bowlhead99bowlhead99 Forumite
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    How do you know that isn't just the charge on only the "Fund" of funds?

    The only one I've found which gives me clarity is Legal General Multi Index 7 which says on the KIID:
    " This Fund's ongoing charges include any charges made by any other
    funds it may invest in. They exclude portfolio transaction costs"

    It's industry standard to do it that way. The OCF of an OEIC should include the OCF of the other OEICs or ETFs in which it invests.

    For your HSBC Global Strategy Dynamic you could see from the prospectus that the AMC is 0.1% and OCF (which includes AMC) is 0.2%. Then you could read their blurb on the prospectus and learn:
    The ACD is entitled under its agreement with the Company to take an annual fee out of each Fund, which is a percentage per annum of the Net Asset Value of the Fund (plus VAT, if any), calculated on a mid-market basis, in payment for carrying out its duties and responsibilities, this is known as the Annual Management Charge (the “AMC”). The AMCs, shown in the table below, accrue daily and are payable monthly in arrears.

    The ACD shall also be entitled to receive an annual fee, calculated as a percentage per annum of the Net Asset Value (plus VAT, if any) of the Fund and payable out of the scheme property, in return for providing registration services. The registration fee accrues daily and is payable monthly in arrears.

    The Ongoing Charges Figure (OCF) shown in the table below is based on actual expenses for the relevant accounting period, or an estimate of expenses where, for example, a change has been made to the charging structure during an accounting year. It covers most aspects of operating the Fund during the year, including fees paid for investment management, the services of the Depositary, custody of the scheme property and other administration and the independent oversight functions. Where the Fund invests in other funds, the fgure includes the impact of the charges made in those other funds. The OCF does not include portfolio yransaction costs and payments Shareholders may make to a financial adviser or any other firm through which they invest; Shareholders will pay for these services directly.
  • Thank you bowlhead, I actually tried to find the prospectus but couldn't find it.

    So it seems AMC doesn't include underlying fund charges but OCF does, is that a fair general opinion?

    Have you ever encountered a fund where the OCF does not include the underlying funds charges?
  • AlanP_2AlanP_2 Forumite
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    T

    So it seems AMC doesn't include underlying fund charges but OCF does, is that a fair general opinion?

    Have you ever encountered a fund where the OCF does not include the underlying funds charges?


    I think it could be more accurately put that the AMC is the "management" fee they charge whilst the OCF is the "overall" charge as outlined by Bowlhead.

    AMC is the fund of fund providers cut / income whilst OCF includes "other" costs that you pay.

    Second point - NO, as all operating to same industry standard / regulation.
  • SailtheworldSailtheworld Forumite
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    There are still portfolio transaction costs to add and these do require some digging to find out how much they are. My understanding is they are higher for funds of funds.

    Last year the FT found a couple of examples..
    Vanguard’s Life Strategy 40 per cent equity fund has a total cost of 0.33 per cent when trading costs are added, significantly higher than its OCF of 0.22 per cent.

    Active funds incur trading costs too but many come out cheaper than passive funds where trading costs are concerned, if their managers employ buy-and-hold strategies. Fundsmith Equity, an infrequent trader with £1.4bn of assets, has transaction costs of just 0.05 per cent for 2016 — the most recent full year for figures. By contrast, Woodford Equity Income costs 1.03 per cent when trading costs are added to its 0.75 per cent OCF, according to the Lang Cat. Invesco Perpetual Global Targeted Returns’ total costs are 39.8 per cent higher than its 0.88 per cent OCF.

    https://www.ft.com/content/61adb26a-0102-11e8-9650-9c0ad2d7c5b5
  • The transaction costs should be included in the OCF imo. Would be easier to see just one figure.
  • SonOfSonOf Forumite
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    The transaction costs should be included in the OCF imo. Would be easier to see just one figure.

    You can see one figure. You add the OCF to the transaction charges and that gives you the total (you should also include incidental charges but for most funds that is zero)
  • edited 23 October 2019 at 11:14AM
    bowlhead99bowlhead99 Forumite
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    edited 23 October 2019 at 11:14AM
    The transaction costs should be included in the OCF imo. Would be easier to see just one figure.

    When a fund wants to buy 10000 shares of a company whose mid-price is £1, it may need to pay £10060 to get them instead of just £10000 because of stamp duty, broker fees and the spread between buying and selling prices. It pays over the money and records in its financial accounts that it holds assets which have cost £10060.

    The next day it gets to a valuation point and looks at the market and sees that the bid price of the shares is now £1 so it revalues the assets down to £10000 and recognises a small but unrealised loss (value is lower than cost, even though perhaps the mid price has risen a little bit, you can't sell at mid price). Then the next day the price rises a bit and they revalue upwards, more unrealised value gain. And the value of the holding (and the fund) rolls forward day to day.

    The next month the share's mid price is £2 (it has doubled since purchase) and the manager decides to sell them all. With the bid price being a little lower than the mid price, and the fact there will be a commission from the broker to place the trade, perhaps they get sales proceeds of £19985.

    The fund has turned its unrealised investment gains into a realised gain, and improved the value of the fund overall by (19985-10060 = )£9915. The £9915 of realised capital gain is a 98.7% profit on the investments bought.

    At no point has the fund incurred the type of operating costs that feature as separate lines in an accounting profit and loss account or 'ongoing charges figure'. All that sits on the profit and loss account is a £9915 gain on buying shares in ABC Ltd. It is true that if it had been possible to buy and sell the shares without incurring transaction taxes or using a broker to execute the trade, the gain would be higher than what was actually achieved.

    Still, the net return of 98.7% is what the investor gets, and there is no hiding from the effect of excessive costs. If a rival fund produces 99.5% over the same period because they did less trading, or larger more efficient trades or smaller more efficient trades, or bought assets which didn't attract stamp duties - their investors will see better returns on a performance chart, and say well done to them.

    The financial regulators have said it's better if funds show their transaction costs, and forced extra disclosure (separate to OCF) upon them. But those costs don't go through the profit and loss accounts separately so fund managers have to reverse engineer them by going back through the records and looking at what the bid and offer prices were when they placed orders and seeing what total price they actually paid and got. In some cases you get bizarre things like negative transaction costs because the process is a bit flawed.

    As ultimately the total cost of operations (and total investing income and gains and revaluations) 'all comes out in the wash' of total NAV return, some investors will not be too fussed about comparing one fund's flawed measure of transaction cost estimates with another's, especially when next year's transaction costs may differ substantially (e.g. stamp duties when an open ended UK focused fund is growing will be higher than when it's suffering net redemptions).

    It is always good to understand what you are investing in but general assumptions can be made that funds with barely any portfolio turnover or active share will have lower ongoing costs than a fund that churns the whole portfolio every six months or invests in expensive-to-transact asset classes such as property or private equity. Ultimately the return will be what it will be, and will always be stated net of all costs that the fund bears, but useful to have in your mind that some funds will have more ongoing costs to run their strategy regardless of whether the market is kind to their strategy in a particular period.
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