Re: Vanguard - Irish retail investors lose out
Ok, let's just recap what is possible in Ireland today without having to buy a standard off-the-shelf insurance company product.
PENSION INVESTORS
It is possible to set up a self-invested pension depending on your tax status:
You could have a Small Self Administered Scheme (SSAS) if you are a Company Director or a senior employee of a company. The fixed costs of having your own personal trust mean that this is really only an option if your fund is €100,000+
Or you could set up a self-invested Buy out bond, PRSA or Personal Pension - however this will typically be administered by an Irish Stockbroker and will have relatively high charges.
Standard Life have entered the market offering a half-way house with their link to Stocktrade in the UK but this contract still has relatively high charges and trading costs compared to a low-cost SIPP in the UK.
For reference. we are working on a deal with an Insurance Company in Ireland to offer a new self-invested pension product which will have a charge of just 0.5%pa for the self-employed who can't have a SSAS, for PRSAs and Buy-out bonds and link to a lower cost execution-only broker. The minimum fund size will be €50,000) For comparison Quinn charge 1.5%pa of their self-directed pension.
Within a Small self administered scheme (SSAS), it is already possible to use a low cost execution only broker rather than an Irish broker to buy ETFS such as IShares and Lyxor.
For our SSAS clients we already offer advice on exchange traded funds with brokerage fees for a fixed charge of £25 per trade UK Market, €30 per trade or $12 per trade.
ALTERNATIVES TO VANGUARD FOR IRISH INVESTORS
Yes, it is already possible for Irish resident investors to buy Institutional class index funds in Ireland today. [broken link removed].
We offer investors a range of index funds for both pension and non-pension investors with annual management charges of typically 0.3% to 0.75%pa. Again due to the fixed costs associated with custodians the minimum portfolio is €100,000.
However, we are hoping to launch a contract based on an Irish Insurance Bond in the near future which would have a minimum investment of €50,000 and would also wrap up the tax for investors who don't want to do their own tax returns.
Traditional trackers vs "enhanced" trackers
The key to understanding trackers (index funds or ETFs) is that a traditional tracker is not indifferent about the time that they trade. A tracker wants to minimise tracking error, which means they have to get in and out of stocks WHEN the index does. This means that they do not get the best prices when the index is reconstituted and therefore a traditional index fund subtracts value.
An "enhanced" index fund is not indifferent about the price paid and is not attempting to minimise tracking error. Value can therefore be added compared to the commercial index funds simply by not trading along with an index.
We can quantify the potential value added with some examples:
Compared to MSCI Emerging Markets since inception
Emerging Markets Value Fund Plus 715 basis points.
This means that the fund outperformed the benchmark index by 7.15%pa since 1998.
Emerging Markets Small Cap Fund plus 565 basis points since 1998.
Benchmark Russell 2000
US Micro Cap Portfolio plus 196 Basis points since 1982.
Benchmark Russell 2000 Value
US Small Cap Value Fund plus 224 Basis points since 1993
Benchmark UK Small Companies
UK Small Companies Fund plus 657 basis points since Feb 2004.
FINALLY
To illustrate the importance of really understanding the fees we pay for traditional investment funds, we have recently completed an analysis of the estimated cost of an average managed fund in Ireland today. Our estimate of the real costs breaks down as follows:
Quoted annual management charge 1%pa
Other costs (administration, custody etc) not disclosed 0.91%pa (1)
Trade impact costs based on average turnover 1.44%pa (2)
TOTAL 3.35%pa
[broken link removed]
1 - These costs known as Total Expense Ratios or TERs are disclosed for SICAVS, UCITS and other forms of Unit Trusts but there is no requirement in Irish Legislation for Insurance Companies to disclose these additional costs. The estimated figure is the average across the EU for an actively managed equity fund calculated by Morgan Stanley. Given the lack of economies of scale in Ireland we believe it is reasonable to conclude that the potential costs will be even higher than this average in Ireland.
2 Turnover relates to the number of times an active fund manager trades stocks in a portfolio. Studies from Lipper Fitzrovia in the UK estimated that on average a fund can be expected to turnover around 70-80% of holdings in a year. A study by the UK Regulator estimated that the cost to a retail investor of this level of turnover equates to approx 1.44%pa (FSA occasional paper by Kevin James, February 2000: The Price of Retail Investing in the UK.)
Another study concluded the following:
[FONT="]“ We estimate trading costs for a large sample of equity funds and find that they are comparable in magnitude to the expense ratio.”*[/FONT]
[FONT="]Roger M. Edelen, Richard Evans, and Gregory B. Kadlec, “Scale Effects in Mutual Fund Performance: The Role of Trading Costs” (working paper, March 17, 2007).[/FONT]
Ok, let's just recap what is possible in Ireland today without having to buy a standard off-the-shelf insurance company product.
PENSION INVESTORS
It is possible to set up a self-invested pension depending on your tax status:
You could have a Small Self Administered Scheme (SSAS) if you are a Company Director or a senior employee of a company. The fixed costs of having your own personal trust mean that this is really only an option if your fund is €100,000+
Or you could set up a self-invested Buy out bond, PRSA or Personal Pension - however this will typically be administered by an Irish Stockbroker and will have relatively high charges.
Standard Life have entered the market offering a half-way house with their link to Stocktrade in the UK but this contract still has relatively high charges and trading costs compared to a low-cost SIPP in the UK.
For reference. we are working on a deal with an Insurance Company in Ireland to offer a new self-invested pension product which will have a charge of just 0.5%pa for the self-employed who can't have a SSAS, for PRSAs and Buy-out bonds and link to a lower cost execution-only broker. The minimum fund size will be €50,000) For comparison Quinn charge 1.5%pa of their self-directed pension.
Within a Small self administered scheme (SSAS), it is already possible to use a low cost execution only broker rather than an Irish broker to buy ETFS such as IShares and Lyxor.
For our SSAS clients we already offer advice on exchange traded funds with brokerage fees for a fixed charge of £25 per trade UK Market, €30 per trade or $12 per trade.
ALTERNATIVES TO VANGUARD FOR IRISH INVESTORS
Yes, it is already possible for Irish resident investors to buy Institutional class index funds in Ireland today. [broken link removed].
We offer investors a range of index funds for both pension and non-pension investors with annual management charges of typically 0.3% to 0.75%pa. Again due to the fixed costs associated with custodians the minimum portfolio is €100,000.
However, we are hoping to launch a contract based on an Irish Insurance Bond in the near future which would have a minimum investment of €50,000 and would also wrap up the tax for investors who don't want to do their own tax returns.
Traditional trackers vs "enhanced" trackers
The key to understanding trackers (index funds or ETFs) is that a traditional tracker is not indifferent about the time that they trade. A tracker wants to minimise tracking error, which means they have to get in and out of stocks WHEN the index does. This means that they do not get the best prices when the index is reconstituted and therefore a traditional index fund subtracts value.
An "enhanced" index fund is not indifferent about the price paid and is not attempting to minimise tracking error. Value can therefore be added compared to the commercial index funds simply by not trading along with an index.
We can quantify the potential value added with some examples:
Compared to MSCI Emerging Markets since inception
Emerging Markets Value Fund Plus 715 basis points.
This means that the fund outperformed the benchmark index by 7.15%pa since 1998.
Emerging Markets Small Cap Fund plus 565 basis points since 1998.
Benchmark Russell 2000
US Micro Cap Portfolio plus 196 Basis points since 1982.
Benchmark Russell 2000 Value
US Small Cap Value Fund plus 224 Basis points since 1993
Benchmark UK Small Companies
UK Small Companies Fund plus 657 basis points since Feb 2004.
FINALLY
To illustrate the importance of really understanding the fees we pay for traditional investment funds, we have recently completed an analysis of the estimated cost of an average managed fund in Ireland today. Our estimate of the real costs breaks down as follows:
Quoted annual management charge 1%pa
Other costs (administration, custody etc) not disclosed 0.91%pa (1)
Trade impact costs based on average turnover 1.44%pa (2)
TOTAL 3.35%pa
[broken link removed]
1 - These costs known as Total Expense Ratios or TERs are disclosed for SICAVS, UCITS and other forms of Unit Trusts but there is no requirement in Irish Legislation for Insurance Companies to disclose these additional costs. The estimated figure is the average across the EU for an actively managed equity fund calculated by Morgan Stanley. Given the lack of economies of scale in Ireland we believe it is reasonable to conclude that the potential costs will be even higher than this average in Ireland.
2 Turnover relates to the number of times an active fund manager trades stocks in a portfolio. Studies from Lipper Fitzrovia in the UK estimated that on average a fund can be expected to turnover around 70-80% of holdings in a year. A study by the UK Regulator estimated that the cost to a retail investor of this level of turnover equates to approx 1.44%pa (FSA occasional paper by Kevin James, February 2000: The Price of Retail Investing in the UK.)
Another study concluded the following:
[FONT="]“ We estimate trading costs for a large sample of equity funds and find that they are comparable in magnitude to the expense ratio.”*[/FONT]
[FONT="]Roger M. Edelen, Richard Evans, and Gregory B. Kadlec, “Scale Effects in Mutual Fund Performance: The Role of Trading Costs” (working paper, March 17, 2007).[/FONT]