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  • FIRST POST
    • newbinvestor
    • By newbinvestor 21st Oct 19, 12:27 PM
    • 218Posts
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    newbinvestor
    Fund of Funds = double the charges?
    • #1
    • 21st Oct 19, 12:27 PM
    Fund of Funds = double the charges? 21st Oct 19 at 12:27 PM
    Does anyone know if you pay charges on the funds held within the fund?
    For example LifeStrategy 100, the fund charge is 0.22%

    The fund holds many Vanguard funds, eg US equity index which has a charge of 0.10%

    Therefore, would you pay 0.22% + 0.10%? Or just the 0.22 for the "parent" fund?
Page 1
    • coyrls
    • By coyrls 21st Oct 19, 12:35 PM
    • 1,295 Posts
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    coyrls
    • #2
    • 21st Oct 19, 12:35 PM
    • #2
    • 21st Oct 19, 12:35 PM
    Just the 0.22.
    • Albermarle
    • By Albermarle 21st Oct 19, 12:47 PM
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    Albermarle
    • #3
    • 21st Oct 19, 12:47 PM
    • #3
    • 21st Oct 19, 12:47 PM
    Although terminology in this area can be fluid, normally a ' fund of funds' refers to a managed/active fund containing other managed/active funds .
    These are expensive as there are two layers of active fund management charges.
    • MaxiRobriguez
    • By MaxiRobriguez 21st Oct 19, 12:47 PM
    • 639 Posts
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    MaxiRobriguez
    • #4
    • 21st Oct 19, 12:47 PM
    • #4
    • 21st Oct 19, 12:47 PM
    The 0.22 accounts for any charges of the underlying funds, hence why it's double.
    • newbinvestor
    • By newbinvestor 21st Oct 19, 12:50 PM
    • 218 Posts
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    newbinvestor
    • #5
    • 21st Oct 19, 12:50 PM
    • #5
    • 21st Oct 19, 12:50 PM
    Although terminology in this area can be fluid, normally a ' fund of funds' refers to a managed/active fund containing other managed/active funds .
    These are expensive as there are two layers of active fund management charges.
    Originally posted by Albermarle
    Isn't the LS100 a fund of funds?
    • SonOf
    • By SonOf 21st Oct 19, 12:50 PM
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    SonOf
    • #6
    • 21st Oct 19, 12:50 PM
    • #6
    • 21st Oct 19, 12:50 PM
    As mentioned above, you are not paying the full charge of the underlying funds in addition to the OCF of the fund of funds. However, there are increased costs but these are reflected in both the transaction charge column and the OCF column.

    So, in the case of VLS100, the charges are 0.22% OCF and 0.03% Transaction charges (total 0.25%). Fund of funds tend to have higher transaction charges but as VLS100 is fettered rather than unfettered, its only about 0.01% more for administration whilst the OCF is increased to allow vanguard to build in their margin and cover the cost of the underlying funds.
    Last edited by SonOf; 21-10-2019 at 12:52 PM.
    • bostonerimus
    • By bostonerimus 21st Oct 19, 1:49 PM
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    bostonerimus
    • #7
    • 21st Oct 19, 1:49 PM
    • #7
    • 21st Oct 19, 1:49 PM
    Isn't the LS100 a fund of funds?
    Originally posted by newbinvestor
    In general terms yes it is; it's a single fund that is made up of other funds and so when you buy it you have a ready made portfolio. You will see the fees on any fact sheet and they will be higher than many of the underlying funds as you are paying for the administration of the portfolio of funds and those fund charges are baked into the fee you see. Such funds run the spectrum from being unfettered ie they can buy funds from any company and manager and also change be actively managed to something like VLS100 that is fettered as it only contains Vanguard funds.
    Misanthrope in search of similar for mutual loathing
    • ColdIron
    • By ColdIron 22nd Oct 19, 12:08 PM
    • 5,511 Posts
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    ColdIron
    • #8
    • 22nd Oct 19, 12:08 PM
    • #8
    • 22nd Oct 19, 12:08 PM
    Does anyone know if you pay charges on the funds held within the fund?
    For example LifeStrategy 100, the fund charge is 0.22%

    The fund holds many Vanguard funds, eg US equity index which has a charge of 0.10%

    Therefore, would you pay 0.22% + 0.10%? Or just the 0.22 for the "parent" fund?
    Originally posted by newbinvestor
    Haven't we been round this loop before? See your post #17 in your thread below and my (and others) replies to your question e.g. my Waitrose analogy

    https://forums.moneysavingexpert.com/showthread.php?t=6052297
    • bowlhead99
    • By bowlhead99 22nd Oct 19, 1:01 PM
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    bowlhead99
    • #9
    • 22nd Oct 19, 1:01 PM
    • #9
    • 22nd Oct 19, 1:01 PM
    Haven't we been round this loop before? See your post #17 in your thread below and my (and others) replies to your question e.g. my Waitrose analogy

    https://forums.moneysavingexpert.com/showthread.php?t=6052297
    Originally posted by ColdIron
    Yes, I thought I had answered the question recently, my post #24 in that thread after OP had said "it's not clear, but you are probably right".

    It is clear, because there are industry-standard disclosure requirements which OEIC funds adopt and will tell you in their prospectus or other marketing material how they are doing it (especially if they are doing it a different special way).
    • newbinvestor
    • By newbinvestor 22nd Oct 19, 2:34 PM
    • 218 Posts
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    newbinvestor
    I still think this is confusing sorry.

    For example HSBC Global Strategy (adventurous) holds Ishares SP500.

    From what I can see, the factsheet nor Key Information Document state anything about the charges on this fund within the fund. It is confusing and lacks clarity.
    • Lokolo
    • By Lokolo 22nd Oct 19, 2:37 PM
    • 20,243 Posts
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    Lokolo
    I still think this is confusing sorry.

    For example HSBC Global Strategy (adventurous) holds Ishares SP500.

    From what I can see, the factsheet nor Key Information Document state anything about the charges on this fund within the fund. It is confusing and lacks clarity.
    Originally posted by newbinvestor
    But you don't need to know what the underlying funds cost, it's all calculated and shown in the overall fund cost.
    • newbinvestor
    • By newbinvestor 22nd Oct 19, 2:54 PM
    • 218 Posts
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    newbinvestor
    But you don't need to know what the underlying funds cost, it's all calculated and shown in the overall fund cost.
    Originally posted by Lokolo
    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"
    • Lokolo
    • By Lokolo 22nd Oct 19, 3:46 PM
    • 20,243 Posts
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    Lokolo
    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"
    Originally posted by newbinvestor
    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.
    • bowlhead99
    • By bowlhead99 22nd Oct 19, 3:49 PM
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    bowlhead99
    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"
    Originally posted by newbinvestor
    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.
    • newbinvestor
    • By newbinvestor 22nd Oct 19, 3:57 PM
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    newbinvestor
    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
    • By AlanP 23rd Oct 19, 8:42 AM
    • 1,764 Posts
    • 1,414 Thanks
    AlanP
    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?
    Originally posted by newbinvestor

    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.
    • Sailtheworld
    • By Sailtheworld 23rd Oct 19, 8:59 AM
    • 538 Posts
    • 561 Thanks
    Sailtheworld
    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
    • newbinvestor
    • By newbinvestor 23rd Oct 19, 9:48 AM
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    newbinvestor
    The transaction costs should be included in the OCF imo. Would be easier to see just one figure.
    • SonOf
    • By SonOf 23rd Oct 19, 10:52 AM
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    SonOf
    The transaction costs should be included in the OCF imo. Would be easier to see just one figure.
    Originally posted by newbinvestor
    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)
    • bowlhead99
    • By bowlhead99 23rd Oct 19, 11:01 AM
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    bowlhead99
    The transaction costs should be included in the OCF imo. Would be easier to see just one figure.
    Originally posted by newbinvestor
    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.
    Last edited by bowlhead99; 23-10-2019 at 11:14 AM.
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