Hidden Charges

MoneyGeoff wrote: »

I understand there are extra charges such as Transaction costs, HL Management charge etc but I'm specifically referring to the Ongoing Charge which is almost double the amount stated on the main page

I've asked HL and they say that new EU legislation known as MiFID II came into force on 3 January 2018. The Transaction Costs on the' Costs' tab may appear to be higher, however this is because they had to factor in other costs such as dealing commission, custodial charges, taxes, etc, which are incurred by the fund manager.

I'm not getting it. The commission, Transaction Costs etc are broken down in separate lines. Why does that cause the Ongoing Charge to double? If the Ongoing Charge has a different value in different contexts then it's a bit meaningless.

Yes unfortunately it is more than a little confusing. For SMT, the figure of what the 'ongoing charges' are (the traditional OCF that people are familiar with) is quoted at 0.44 based on the last time they did the exercise at March 2017. However, as your HL person told you, the MIFID II / PRIIPS rules make them go and dig out other figures to "helpfully" inform you of various other levels of costs. That can include taxes or gearing costs.

So SMT's total ongoing costs to operate, if you picked through their profit and loss account for the year and included gearing costs etc, are now 0.84%, which is more than the basic running costs of 0.44% from back when you didn't have to project a number for the other stuff and include it in the costs. It might be meaningless, as after all, from the fund manager point of view you don't know what your borrowing costs will be next year because you don't know what if any gearing you'll choose to employ. And it is not a fee or charge levied by the manager, it's paid to the lenders. But the financial regulators say it's useful to come up with a number, so they came up with a number.

https://www.bailliegifford.com/en/uk/intermediaries/literature-library/funds/investment-trusts/scottish-mortgage/scottish-mortgage-key-information-document/

You can see from the KID that the transaction costs are -0.01%. That doesn't mean they got paid by their brokers to make trades. It can be things like the fact that they placed an order at $1300 a share (plus broker fees) to buy some Amazon shares but by the time their full order had been worked through, they only paid $1299 including broker fee per share so the "transaction costs" were negative in that instance. Of course, they paid their broker a non-negative commission but they are reporting in line with the framework they're being forced to work with....

Personally, faced with those numbers, I would just be happy with the old way of doing it - the fund is a large and efficient one which can run an active management program for under 0.5% of NAV per year, but I know that behind the scenes there are some inevitable transaction costs to buy and sell underlying investments whenever the manager thinks it makes sense to do so, and the will be some gearing costs to arrange finance if they try to increase the performance of the find by borrowing, which isn't guaranteed to work out if the extra gains don't cover the costs. Their full audited financial statements are published for my review every year.

I will see all of that stuff in the bottom line results when I look back on my gains and losses. It would be interesting if I could guarantee that every fund I was comparing would definitely be recording and estimating all the costs in the same way on these KIDs, but they probably don't, but as the funds I buy don't all have the same strategies anyway, their costs might not be comparable in any case - due to different structures or strategies...