Irish Life Funds vs ETF investing

Joey101

Registered User
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26
Hi all,

Having underwent a lot of research in the last few weeks, I'm going to outline my argument here as to why I believe the an Irish Life fund product would be a better choice for someone looking to invest a lump sum of +20k such as myself and would like to see any feedback. For simplicity, I'm taking the Irish Life Consenus Fund which has the most capital of any fund in Ireland.

Consensus Fund pros:

  • Automatically rebalances your portfolio for no additional charge. There are many articles/books written on the importance of rebalancing a diversified 'lazy portfolio' at least annually. UPDATE: Seen as a pro if you're entire 'investments pot' would be in a fund (see post number 7)
  • Has a 5 year per annum return of 10.3% (before taxes and charges- see cons below) UPDATE: Past performance is not an indicator of future performance (see post number 7)
  • Has assets to the value of €5.3 billion. UPDATE: Not seen as particularly important - no research to suggest that large funds perform better. However they tend to have a better record.
  • Is highly diversified across equities, bonds and a little in cash and property UPDATE: This can easily be achieved with ETFs - added as a pro for ETFs.
  • You are allowed to move your portfolio from one fund to a more/less risky fund free of charge whilst investing.
  • I believe you can add savings amounts to it occasionally, however I am focusing here on investing a lump sum. UPDATE: yes you can invest additional lump sum amounts - they must be at least €1,000. Also you could do this with any type of investment however others may incur transaction costs
  • All taxation issues are handled by Irish Life (submitting returns/forms, the deduction of stamp duty etc.)
Consensus Fund cons:

  • According to AIB Portfolio Invest (I cant post the link as this is my first post), the annual fee is 1%. According to Irish Life the annual fee is 1.5% - I'm currently investigating this. It should be noted that Irish Life's "regular invest" version of the funds charge 1.65% therefore lump sum is more tempting for me
  • 1% stamp duty wiped off your investment straight away
  • You are betting on the success of Irish investment managers
  • Minimum investment of 20k
  • Additional charges (on top of taxation) for making a withdrawal within 5 years - 5% within 3 years, 3% in 4th year, 1% in 5th year
ETF pros:

  • You get to decide which markets you invest in and at what asset allocation percentages
  • The expense ratio's of ETFs are generally very low for large ETFs (can be less than 0.1% in most cases) and a highly diversified portfolio can be (arguably) made with as little as 2-3 ETFs
  • It can be fun and a hobby to be in full control of your portfolio
  • You don't pay any stamp duty when investing in ETFs
  • Easy and cheap to achieve portfolio diversification
ETF cons:

  • I believe the cheapest online broker is TD Direct. Charges are €20 per trade. As long as you invest more than 5k, you won't be charged any quarterly fees.
  • You must declare purchases of any ETFs not listed on the IFSRA website as a UCITS
  • If you hold an ETF for more than 8 years you need to fill out a form 11 as also discussed in the above thread and pay tax (I believe this is a type of preliminary tax - your actual tax bill will be calculated on actual disposal and you will either pay more or receive a reimbursement at this time)
  • Detailed records will need to be kept of all purchases and sales, number of shares, price, date, tax rate at that date in order to calculate your taxes due. Having said that, this sounds more complicated than it may be if you are comfortable keeping an excel sheet with the data
  • It would be advisable to only invest in ETFs that reinvest dividends otherwise all dividends will be taxed and if you wanted to manually reinvest them, you would incur transaction costs with the broker
  • Lastly, a very important point - the cost of rebalancing an ETF portfolio doesn't seem to be mentioned very much in this forum. Rebalancing effectively means maintaining the asset allocations to each ETF market you are invested in. With ETFs, if you wish to rebalance you will be taxed and also incur the broker transaction costs - the combination of the two on an annual/semi annual basis I think would be crippling to portfolio returns. There was an excellent post here in relation to the matter in the thread "Availability of Index tracking funds in Ireland" by Olivetti but I can't post the link without having more posts myself :(
I would like to see what people's responses are in relation to this, - particularly given the fact that AIB appear to be only charging 1% as mentioned above. I was initially drawn to the glamor of ETF investing but this interest has faded the more I've read. I will add to pros and cons of either investment strategy if pertinent points are made. I'd also like to acknowledge that I have no affiliation to Irish Life, AIB or TD Direct.

UPDATE:

Shares pros:
Lowest costs of all if you resist the temptation to call the market and avoid trading
Tax efficient use of capital gains and losses
Subject to CGT at 33% instead of 41% on unit-linked funds and ? on ETFs.
0% CGT if you still own the shares when you die - compared with 41% on the unit-linked funds. Older people should only invest directly in shares because of this huge advantage.


Shares cons:
  • Higher tax on the dividend income than on profits of pooled funds
Illusory disadvantages of shares

  • Unable to achieve the diversification of funds. This is massively overstressed by people selling funds.
 
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The management fee is Irish Life's charge for managing the fund, light & heat, profit etc. You also have the cost of buying the various trades. This is factored into the unit price. No Irish insurance company discloses their TER. I was talking to an English fund manager last week and he was shocked at this lack of disclosure.

Unlike a lot of people who post here, I have no problem in paying someone to invest for me. I do not have the level of expertise that fund managers have. The problem is, most fund managers do not try to beat the average. The Consensus fund being the perfect example. It's goal is to achieve average results.

If you are going to pick a fund manager, pick one who sole purpose is not to just about beat the average because that is what their bonus is based on.

If you have the time, interest and expertise, do it yourself. With less charges, you will make more money...if you do it right.


Steven
www.bluewaterfp.ie
 
Excellent post Joey, and I look forward to seeing your points explored further.

The thing that jumps out at me is that investing through an EFT may not be cheaper that through a fund.

You mention the cost of rebalancing and the brokers fees that would be involved.

On the fund side is the 1% or 1.5% management fee the total charge an investor faces, are there not also charges within the fund?
 
Unlike a lot of people who post here, I have no problem in paying someone to invest for me. I do not have the level of expertise that fund managers have.

No reasonable person objects to paying anyone for doing a job.

However fund managers generally expect to be paid just for turning up, whether or not they do the job.
 
Hi all,

I would like to see what people's responses are in relation to this, - particularly given the fact that AIB appear to be only charging 1% as mentioned above. I was initially drawn to the glamor of ETF investing but this interest has faded the more I've read. I will add to pros and cons of either investment strategy if pertinent points are made. I'd also like to acknowledge that I have no affiliation to Irish Life, AIB or TD Direct.

On the issue of rebalancing, I think that many people invest as their surplus earning become available say E5,000 every six months. A E20 broker fee is only 0.4% of a E5,000 sum. Also these instalments can be used to rebalance. You don't need to sell holdings, atleast not for awhile. If you stick to just two or three funds rebalancing might not be so prohibitive as long as the portfolio is a certain size. An Irish life fund certainly does has its strengths but over the long term I still think there is a compelling case for ETFs.

BTW rebalancing is great for avoiding dramatic short- and medium-term drops in a portfolio's value but it in the long-term whether it necessarily adds a lot to returns is debated. Yet I think its one of these approaches that becomes more important the older an investor is as it restores the portfolio's risk profile.
 
The management fee is Irish Life's charge for managing the fund, light & heat, profit etc. You also have the cost of buying the various trades. This is factored into the unit price. No Irish insurance company discloses their TER. I was talking to an English fund manager last week and he was shocked at this lack of disclosure.

The problem is, most fund managers do not try to beat the average. The Consensus fund being the perfect example. It's goal is to achieve average results.

If you are going to pick a fund manager, pick one who sole purpose is to just about beat the average because that is what their bonus is based on

So to confirm, the costs of buying various trades or TER is factored into the return of a fund. Similarly, the TER of of ETFs is factored into the return in that you don't see these costs being deducted from your gains when looking at your portfolio on the broker platform - your gains already include the costs. So as long as the returns look decent for a fund, I feel you don't really need to worry about this. I agree that there should be more transparency around these 'sunk costs'.

The problem with choosing a fund that ideally strives to beat the market is that they cost more. A prime example of this is the Multi Asset Portfolio Funds offered by Irish Life as an option under clear invest/clear regular invest. There are a number of funds to choose from depending on volatility but the key point is that they charge an average extra 0.15% according to the booklet and this could go up depending on performance. It's a complete shot in the dark as to whether these will actually perform better also.
 
Hi Joey

It's a peculiar comparison - a specific Irish Life fund to ETFs in general.

I think that the first comparison should be a comparison of unit-linked funds vs. ETFs.
If you find that unit-linked funds are superior to ETFs, then you try to choose between the different unit-linked funds.

You list a lot of Pros which are not pros at all

  • Automatically rebalances your portfolio for no additional charge. There are many articles/books written on the importance of rebalancing a diversified 'lazy portfolio' at least annually.
  • This is completely overdone. If you are investing your entire assets in a fund, it might have some value. I presume €20k is not your entire assets. You probably have a home, a pension and other savings and investments.
  • Has a 5 year per annum return of 10.3% (before taxes and charges- see cons below)
  • Completely irrelevant. Past performance is not an indicator of future performance. 5 years is a meaningless term
  • Has assets to the value of €5.3 billion
  • So what? I am not aware of any research that suggests size on its own is an advantage. Of course, funds with a good record, tend to be larger.
  • Is highly diversified across equities, bonds and a little in cash and property
  • You can achieve all or most of this easily enough.
  • You are allowed to move your portfolio from one fund to a more/less risky fund free of charge whilst investing
  • This may be an advantage if you are able to predict which asset class will do best over the medium term. I can't, but maybe others can.
  • I believe you can add savings amounts to it occasionally, however I am focusing here on investing a lump sum. UPDATE: yes you can invest additional lump sum amounts - they must be at least €1,000
  • But you can do this with any type of investment.
  • All taxation issues are handled by Irish Life (submitting returns/forms, the deduction of stamp duty etc.)
  • This is an advantage.
 
The biggest advantage of ETFs over funds is the charges. The very high costs of unit linked funds dramatically reduce the returns over time. Your example of the early withdrawal charges in Irish Life is just an example of how bad they can be.

The big advantage of fund over an ETF, is that a loss on one sub-fund can be set against the profit in another, before calculating the tax. #

Say I buy a shares ETF and a bond ETF. The shares ETF rises by €10,000 and the bonds ETF falls by €10,000. If I need cash, I will sell the shares ETF and pay tax on the gain. I will have to keep the bonds ETF until it returns to the price I paid for it.

If I have €10,000 profit on a sub-fund within a unit linked fund and €10,000 losses, if I need cash, I can cash part of it and pay no tax.
 
But the real comparison should be between a "pooled investment" and direct investment in a passive portfolio of shares.

The shares is a bit more work, but the advantages are many

  • Lowest costs of all if you resist the temptation to call the market and avoid trading
  • Tax efficient use of capital gains and losses
  • Subject to CGT at 33% instead of 41% on unit-linked funds and ? on ETFs.
  • 0% CGT if you still own the shares when you die - compared with 41% on the unit-linked funds. Older people should only invest directly in shares because of this huge advantage.
The disadvantages of shares


  • Higher tax on the dividend income than on profits of pooled funds
Illusory disadvantages of shares

  • Unable to achieve the diversification of funds. This is massively overstressed by people selling funds.
 
  • 0% CGT if you still own the shares when you die - compared with 41% on the unit-linked funds. Older people should only invest directly in shares because of this huge advantage.
Is this true for US shares as well? How are US shares taxed at death?
 
Consensus

Joey

Like Brendan I find focussing on a single unit-linked fund curious but putting that to one side:

- the uplift from the annual management charge to a properly calculated TER would be very small: for a very big fund like Consensus the uplift would be 2/3 bps

- I find references to Consensus as highly diversified odd - it has close to 80% in equities - the fact that those equities are highly diversified is imortant but it is the allocation across the asset classes (bonds/equities etc) which reall offers diversification

- numerous studies have shown that rebalancing is a source of added value if carried out systematically over time; Irish Life "rebalances" Consensus in line with the asset allocation of the average pension managed fund (a dwindling pool BTW) but that is not rebalancing....historically that pool of pension managed funds has allowed the equity content to drift in line with markets with little evidence of net sales at high points or net buyinng at low points

Brendan's point about CGT is interesting bt I think it may be more complicated than that - I believe any CGT on death levied against a unit-linked fund is off-set against any CAT liability on the part of the perso who inherits.I am NOT a tax expert but believe this to be the case. Better to pay no tax than depend on an off-set which of course might not arise if the inheritance were within the relevant threshold
 
Brendan's point about CGT is interesting bt I think it may be more complicated than that - I believe any CGT on death levied against a unit-linked fund is off-set against any CAT liability on the part of the perso who inherits.I am NOT a tax expert but believe this to be the case. Better to pay no tax than depend on an off-set which of course might not arise if the inheritance were within the relevant threshold

Hi Monksfield

I am not a tax expert either, but...

When a unit-linked fund is cashed, an exit tax is paid by the fund. There is no CGT as such. I have never heard of a set-off for the exit tax paid by the fund against CAT or anything else.

Say I have €1m in my share portfolio and you have €1m in your unit-linked fund and we both have €500k of gains. And we both die.

My estate will receive €1m.
Your estate will receive €800k. ( less €500k gains@41% exit tax).

Your beneficiaries will pay less CAT, because they will receive less money.

Brendan
 
It's a peculiar comparison - a specific Irish Life fund to ETFs in general.

Fair enough, I thought I'd just take a fairly bog standard (and one of the largest funds in Ireland) as a rough comparison though to show what the mangement fees are like on such a product etc.

  • Automatically rebalances your portfolio for no additional charge. There are many articles/books written on the importance of rebalancing a diversified 'lazy portfolio' at least annually.
  • This is completely overdone. If you are investing your entire assets in a fund, it might have some value. I presume €20k is not your entire assets. You probably have a home, a pension and other savings and investments.

I'm actually quite young, no mortgage, 6 month old pension and some other cash on deposit.


  • Has a 5 year per annum return of 10.3% (before taxes and charges- see cons below)
  • Completely irrelevant. Past performance is not an indicator of future performance. 5 years is a meaningless term

Really? Excuse my ignorance but how else does one go about measuring performance of an ETF or fund - looking at costs and the indexes its linked to only?


  • You are allowed to move your portfolio from one fund to a more/less risky fund free of charge whilst investing
  • This may be an advantage if you are able to predict which asset class will do best over the medium term. I can't, but maybe others can.

I think you're being a bit harsh there - surely this an advantage for someone that is older and after say 5 years wants to reduce their appetite for risk and go for something more bonds heavy than equities


  • I believe you can add savings amounts to it occasionally, however I am focusing here on investing a lump sum. UPDATE: yes you can invest additional lump sum amounts - they must be at least €1,000
  • But you can do this with any type of investment.

True, but you will incur transaction costs with shares, and in this example with TD Direct that would probably be €20... or 2% every time you added €1,000. However RobFer did suggest that most people would probably save up say 5k every 6 months to reduce this.
 
Fair enough, I thought I'd just take a fairly bog standard (and one of the largest funds in Ireland) as a rough comparison though to show what the mangement fees are like on such a product etc.

I having a very hard time making any sense out of what you are saying! As far as I can see there is no product bearing the name you are quoting and comparing it to an ETF, for starters....

As far as I can figure out, what you are describing is an actively managed account with Irish Life, in which they will buy positions in their fund range known as Consensus Funds. If that is the case then your comparison is total nonsense!

To have any semblance of a comparison you need to compare it to some kind of life strategy fund, where the TER is usually around a quarter of a percent, which is a far cry from the fees you are quoting

Really? Excuse my ignorance but how else does one go about measuring performance of an ETF or fund - looking at costs and the indexes its linked to only?

The point is that Irish Life are not providing you with any of the figures needed to make a reasonable comparison! However based a couple of quick calculations I feel the funds are under performing by around 2% or 3% on average. Add another 1% or there about to it in charges and you are wiping anything between 50% and 66% of your potential gain!
 
The point is that Irish Life are not providing you with any of the figures needed to make a reasonable comparison! However based a couple of quick calculations I feel the funds are under performing by around 2% or 3% on average. Add another 1% or there about to it in charges and you are wiping anything between 50% and 66% of your potential gain!

Is this approximately the same for Rabodirect, Standard Life, etc, Funds?

If Yes, what is the alternative available to the small investor (€10k-50k)??
 
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I having a very hard time making any sense out of what you are saying! As far as I can see there is no product bearing the name you are quoting and comparing it to an ETF, for starters....

As far as I can figure out, what you are describing is an actively managed account with Irish Life, in which they will buy positions in their fund range known as Consensus Funds. If that is the case then your comparison is total nonsense!

It's all here, see the pdf for 'Consensus'
It's passively managed

(you'll need to format the link properly - I can't post links):

irishlife.ie/investments/fund-prices-and-performance
 
there is no product bearing the name you are quoting and comparing it to an ETF, for starters....


I simply wanted to look at the pros and cons of one strategy against another. A basket of ETFs vs a diversified fund. I chose a typical fund that a lot of pensions use to give readers a starting point. It doesn't have to be this fund, it can be any fund with any company.
 
Hi Joey,

FWIW my advice would be to read John Bogles book: http://www.amazon.com/Little-Book-Common-Sense-Investing/dp/0470102101. Also, take time to view this series of videos : http://www.sensibleinvesting.tv/ before parting with the returns crippling fees charged by Irish Life or any other active fund "Manager". Personally I would buy a broad based ETF that automatically reinvests dividends. For 20,000 the broker cost to buy an ETF might be a couple of hundred but after that the AMC/TER on a broad based index from Vanguard or Ishares is in the region of 0.07% to 0.25% in most cases, a fraction of the Irish Life charges (1.65% annually?). Good luck.
 
Personally I would buy a broad based ETF that automatically reinvests dividends. For 20,000 the broker cost to buy an ETF might be a couple of hundred but after that the AMC/TER on a broad based index from Vanguard or Ishares is in the region of 0.07% to 0.25% in most cases, a fraction of the Irish Life charges (1.65% annually?). Good luck.

I fully understand this and to be honest, ETFs are what I would love to invest in. The only real thing putting me off are the requirements for taxation and the lack of transparency from the Revenue on the matter

Note: Per AIB this particular fund costs 1% not 1.65%, hence I'm looking to see is there an arguement to go for that
 
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