index tracker funds and charges

nasher

Registered User
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i have 5,000 to invest,looking to invest in an index fund,looked up the irish options and read the best buys threads just wondering if there are any options outside if ireland for this sum of money,i understand there is a currency risk outside of euro any help please.

Moderator's note:
What follows is a very interesting and important analysis of the issues
Brendan

 
Re: index tracker funds

You could have a look at tracker ETFs. Try www.ishares.co.uk & www.etfsecurities.com.
These generally have lower yearly charges than index funds but you have to calculate and pay the tax on them yourself. Its very possible that if you invest in an index fund through some fund management company that ultimately they will reinvest it in some form of ETF anyway. If you buy the EFT directly (brought through a stock broker like individual shares) you cut out the middle man, but there is more work involved for you.
 
Re: index tracker funds

I would avoid purchasing an index fund just yet.

I don't believe the markets have bottomed out and buying and index now will merely follow the market down should we likely fall to a new low.

If you are going to purchase one then I would 'dollar cost average' and put in a sum each month rather than the full 5k now. That way you will buy at different prices per month and help yourself if the markets does fall further.

Long term (i.e. 20 years plus) then index funds are great as they usually (75% of the time) beat the so called 'professional' fund managers.

Don't buy any index fund with management charges over 1%. Fidelity do some good funds where you can buy other companies funds with a management charge discount.
 
Re: index tracker funds

Obviously nobody knows where the bottom of this market is and therefore any statements about timing the market are nothing better than a guess.

In my view investors are better off looking at issues they can manage such as the cost of investment.

Most retail investment funds quote an annual management charge of typically 1% to 2%pa. Many investors mistakenly believe that this is all that they pay in charges.
However, additional hidden costs are present in all investment funds and can be found in the depths of the fund prospectus. These charges are usually not included in the annual fund management charge and are typically as follows:
Custodian Fees 0.011% - 0.608%pa
Expenses 0.15%pa
Administration up to 0.25%pa

Not all funds quote these additional costs, known as a Total Expense Ratios (TERs). However, recently Morgan Stanley estimated that the average TER across Europe was 1.91%pa for an average actively managed equity fund.

According to research by Lipper Fitzrovia in the UK in January 2007 the average fee for multi-manager funds investing into equity funds is 2.2%pa and can be as high as 3%pa. Breaking this down further, the average inclusive TER for a fund of funds investing principally into externally managed equity funds was found to be 2.44%pa.

I have also reviewed several studies into additional hidden costs associated with portfolio turnover. Trading stocks within any fund (even an index tracker or ETF) creates additional costs such as stamp duty, broker commissions etc. These additional costs are also born directly by the investors in the fund and are NOT INCLUDED in the TER.

A study in the UK by the Financial Services Authority estimated that the additional costs for a typical fund turning over 80% of it's holdings in a year could add an additional 1.44%pa in costs.

An 80% turnover might seem like a really high number and one might think unrealistic. But think about it this way, how else is an active fund manager going to justify their additional costs unless they are "active".

Another Lipper Fitzrovia study into UK investment funds in 2007 concluded that the average turnover for a range of popular investment funds averaged 74.57%pa

I can therefore only conclude that the average retail investor in Ireland today investing in a typical average active managed equity fund is paying something like 1.9%pa in TER costs and approaching 1.4%pa in hidden trading costs.

A total annual fee of over 3%pa!

I therefore currently use an Institutional class of passive index funds with an average audited TER of 0.665%pa across a range of Developed and Emerging Market Equity Funds.

As these are using a passive buy and hold investment strategy, this results in considerably lower portfolio turnover on average 8.04%pa.

However, these funds are only available on a fee-only basis as they do not pay any commission.

If you have an investment portfolio of more than €100,000 and are interested in index investing, please feel free to send me a private message.
 
Re: index tracker funds

Obviously nobody knows where the bottom of this market is and therefore any statements about timing the market are nothing better than a guess.

In my view investors are better off looking at issues they can manage such as the cost of investment.

Most retail investment funds quote an annual management charge of typically 1% to 2%pa. Many investors mistakenly believe that this is all that they pay in charges.
However, additional hidden costs are present in all investment funds and can be found in the depths of the fund prospectus. These charges are usually not included in the annual fund management charge and are typically as follows:
Custodian Fees 0.011% - 0.608%pa
Expenses 0.15%pa
Administration up to 0.25%pa

Not all funds quote these additional costs, known as a Total Expense Ratios (TERs). However, recently Morgan Stanley estimated that the average TER across Europe was 1.91%pa for an average actively managed equity fund.

According to research by Lipper Fitzrovia in the UK in January 2007 the average fee for multi-manager funds investing into equity funds is 2.2%pa and can be as high as 3%pa. Breaking this down further, the average inclusive TER for a fund of funds investing principally into externally managed equity funds was found to be 2.44%pa.

I have also reviewed several studies into additional hidden costs associated with portfolio turnover. Trading stocks within any fund (even an index tracker or ETF) creates additional costs such as stamp duty, broker commissions etc. These additional costs are also born directly by the investors in the fund and are NOT INCLUDED in the TER.

A study in the UK by the Financial Services Authority estimated that the additional costs for a typical fund turning over 80% of it's holdings in a year could add an additional 1.44%pa in costs.

An 80% turnover might seem like a really high number and one might think unrealistic. But think about it this way, how else is an active fund manager going to justify their additional costs unless they are "active".

Another Lipper Fitzrovia study into UK investment funds in 2007 concluded that the average turnover for a range of popular investment funds averaged 74.57%pa

I can therefore only conclude that the average retail investor in Ireland today investing in a typical average active managed equity fund is paying something like 1.9%pa in TER costs and approaching 1.4%pa in hidden trading costs.

A total annual fee of over 3%pa!

I therefore currently use an Institutional class of passive index funds with an average audited TER of 0.665%pa across a range of Developed and Emerging Market Equity Funds.

As these are using a passive buy and hold investment strategy, this results in considerably lower portfolio turnover on average 8.04%pa.

However, these funds are only available on a fee-only basis as they do not pay any commission.

If you have an investment portfolio of more than €100,000 and are interested in index investing, please feel free to send me a private message.

This post is about simple index funds you can buy from Fidelity at minimal cost.

Fidelity do minimal cost index funds as low as 0.35%.

As for your quote about the market bottoming being a mere guess, yes I can't call the bottom to the exact level, but it is clear that the P/E ratio of all Western markets is still overvalued against the level at which they bottom during major downturns as we are experiencing now.

The current equities downturn risk is far higher than the upside potential. Hence don't put all your money in at today's price.

Are you proposing the poster puts all 5,000 into a fund at today's price? Can you read that today's price represents good value???????????????

I proposed hedging ones bet by drip feeding one's money into the market over a number of months.
 
Re: index tracker funds

Since my post was about total expense ratios:

The following are examples of some Fidelity funds from across their range. These are all € class SICAVs from their Luxembourg range

Example Bond fund:

Fidelity Funds - Instl Euro Bond I Acc Euro
Minimum investment €500,000
Minimum additional investment €100,000
Annual management charge 0.35%pa
TER 0.41%
Source: Morningstar


Fidelity Funds - FPS Growth A Euro
Annual management charge 1.5%pa
TER 2.43%

Fidelity Funds - Euro STOXX 50 A Euro
Annual management charge 0.6%pa
Total expense ratio 1.0%pa
Source: Morningstar

The Fidelity Eurostox 50 is a simple example of my original point since you could buy an ETF from I shares with a TER of just 0.35%pa for the same 50 stocks.
 
Re: index tracker funds

Marc on this basis you would agree that past performance is no guide to the future?
am I missing something but why should I fire an email to you when I can buy and hold an etf from a discout broker for less than a tenner?
I have a portfolio over 100k but the individual buys are still costing me less than a tenner?
I am still at a loss as to where you come into this?
If you do a search of ETF in AAM you will see I have done a fair bit of spade work in this area.
 
Re: index tracker funds

If you have an investment portfolio of more than €100,000 and are interested in index investing, please feel free to send me a private message.

The OP has 5K to invest.
Nasher before you do anything on investing your 5K invest some time in your finanacial education by buying a few books on investing e.g. Random Walk Down Wall Street for a general overview.
 
Re: index tracker funds

We have two distinct themes here:
1)Market timing and past performance
2)Fees and charges for investments

1)My answer to market timing as an investment strategy is simple. I have never met anyone with a crystal ball! To benefit from attempting to time the market, you need to be correct three times – getting in, getting out and getting back in again. I’ve never met anyone who can do this and even if I did, I would have no way of knowing if their view was luck or skill.


An easier way to look at it is like this; all investors in aggregate make up the market and therefore the rational position for any investor is to aim for the average market return. Why would anyone believe that they possess skill, information or insights in excess of the sum of all other investors in the market and are therefore entitled to obtain a higher return than the average?

Obviously some investors, by definition, will obtain an above average return but no more than we would expect to occur by chance and there is no evidence in the academic literature to support persistence in this performance, supporting the widely held view that luck has more of a part to play than skill. Equally, even if there was an element of skill, we have no idea how we would identify in advance who these people might be i.e. how would you decide to back Peter Lynch at Fidelity in the year 1977?

Past performance as a guide to the future

Again there are two distinct issues to consider here:

Is past performance a guide to the future? If we relate this back to my point about persistency of fund manager performance then the answer is clearly no.

However, when we are talking about the structural relationship between risk and return then the answer is yes, history does offer important insights into the relationship between risk and return over time.

For example as an investor I can expect to be rewarded over time with a higher return from an investment in the stock market compared to an investment in government bonds. The explanation for this is to do with the expected return on capital. Shares are more risky and therefore I expect a higher return for an investment in shares – otherwise why would I take the risk? This is true at anytime, today, yesterday and tomorrow.

Again, all shares have to be held in aggregate and therefore for every seller there is a buyer. If you think shares are going down and you sell, somebody must be taking the other side of the trade. Recent falls in the prices of stocks around the world fully reflect the additional risks associated with the credit crunch and global slowdown. The current price of stocks right now is the fair market price as set by the interaction of all these opinions in the world and all the independent buying and selling decisions.
If I buy today, the price I pay to own stocks today is the compensation for taking on the risk of owning stocks. However, I still expect a positive return over the long term. There is nothing special about current market conditions that would lead me to any other conclusion since all the information is available to everyone and the sum of all opinions is the current market price for the stocks I buy.

As an example let’s consider an investment in the US stock market around the time of the Great Crash of 1929. Logically, if market timing works and given the benefit of hindsight we have from our vantage point in history, one might rationally conclude that an investment made after the Crash should offer the best returns – surely that is the point of attempting to time the market.
The total return of the US Stock market up to end December 1950 was as follows:
January 1928 – December 1950 280.62%
January 1929 – December 1950 174.11%
January 1930 – December 1950 220.79%
January 1937 – December 1950 178.46%
Source: Data provided by the Centre for Research in Securities Prices, University of Chicago


Who would have thought to make an investment ahead of the Crash for the highest overall return? My conclusion is that a market timer is much more likely to be sat on the sidelines waiting for a “clear” signal that the market has turned. Some might even wait for years in our example perhaps until 1937 and still end up with an overall return only marginally better than if they had just bought and held in January 1929 the year of the Crash itself.

Where we use empirical evidence to increase our understanding of the relationship between risk and reward in markets, then past performance can be a useful guide.

2)Fees and charges
My original post was to do with the hidden costs associated with active fund managers. The vast majority of retail financial services products sold to the unsuspecting public are of this type and consequently I feel that a discussion of this subject is long overdue on askaboutmoney.com

However, there are some posters who clearly have a more detailed grasp of these issues and have already worked out for themselves that an investment via an ETF represents a huge leap forward.

My final point is therefore this, in answer to the question why would someone already buying ETFs through a discount broker wish to consider taking investment advice?
The original school of thought around index tracking was that a market capitalisation weighted portfolio is the only legitimate stock investment.


I don't agree that the only legitimate indexing approach is holding the market portfolio. That view persists by the intellectual equivalent of squatters' rights. Since the earliest passive portfolios were based on the broad US market, traditional indexers tend to think any approach besides the market portfolio is closet stock picking


The reality is that most of the indexing approaches fall short of replicating the market by making a concession here or there to accommodate consumer preferences and costs.
Don't get me wrong: it's hard to fault a market index approach. It's better than the vast majority of managed funds, and most investors should require a good reason to invest in something other than the broad market. But if there's more than one type of risk driving returns, it's possible for investors to use a wider range of strategies to gain greater expected returns—all within the bounds of indexing.

Many studies have highlighted that the single most important factor driving returns in a portfolio is asset allocation. The key issue for an investor should therefore be this: what represents an asset class and what is the anticipated or expected relationship between asset classes: i.e. correlations, covariance, risk premium above Treasury Bills etc?
Defining what represents an asset class is important because investors use asset classes as key components of diversified portfolios. For this purpose each asset class needs to have a specific risk-return function.


Sorting stocks on anything other than factors of expected returns can fudge the clarity of the investment process and undermine portfolio diversification. When investors mistake where returns come from, the asset classes they assemble become arbitrary. This can lead to inadvertent tilts on the underlying factors that actually determine returns.


For example, investors sometimes manage industry exposure, as if sectors such as Technology, New Energy or Infrastructure constitute asset classes and ETF providers are happy to oblige with funds available for almost any subset of the market.



By way of validation, analysts talk about what companies produce and how it affects the prospects for their stock prices. However, as Adam Smith pointed out over 200 years ago, a company's industry bears no direct relation to the flow of capital. In other words sorting stocks by sector or industry does not add anything to an investor's portfolio. The reason for this is that I cannot expect to be rewarded at a rate greater than the market rate of return for any risk I can diversify away. So, taking a bet on renewable energy companies does not offer investors a higher expected return than the wider market but it does expose the investor to more risk. The investor can capture exactly the same market rate of return but with less risk, by holding the wider market.


Equally, an investor might seek to diversify their portfolio by including various investments in different countries. Again, the reality of modern global capital flows is that the expected return on any developed economy is exactly the same and there is little to be gained by betting on any particular developed economy. The most sensible starting position for an investor would therefore be a highly diversified global portfolio. By contrast, Emerging Markets do offer a premium expected return above developed economies. The geopolitical issues create additional risks for which investors expect to be rewarded for taking compared to an investment in developed markets.

Using ETFs we might therefore select the MSCI World Index Total Expense Ratio 0.5%pa. Job done.


Sadly not, this is an index of just 691 Stocks with the majority being Large Capitalisation, Growth Stocks,


Research by Fama and French (1992) found that risk factors of market, size, and book-to-market seem to account for virtually all the differences in returns across industry groups (except real estate stocks, which for that reason probably constitute their own asset class).


Therefore for higher expected returns, an investor should hold amongst other things more small companies. Yet, there aren't many publicly available funds that actually hold every stock. There are thousands of tiny stocks at the smaller end of the spectrum that are costly to trade. Retail funds tend to sample from these stocks, buying only some of the names until they have a portfolio that looks and hopefully behaves like that segment of the stock universe. Since the universe of these tiny stocks totals less than 2% of the market, such a practice is hardly egregious, but it can cause portfolio performance to deviate from the index during small-stock bull markets. It also demonstrates that even pure indexers don't mimic the market regardless of costs.


Investments such as ETFs have the inherent limitation that they are based on commercial indexes. Success is measured by tracking error, i.e. how well the index is followed. What if the investor is following the wrong index?


I might use selective ETFs in a portfolio but investors need to be aware of some of the pitfalls. An example might be the negative roll yield on a commodity ETF. This is another hidden cost that many ETF investors are simply unaware off and which can cost a fortune to hold a long position in a commodity compared to the spot price. An analysis of the spot price of sugar compared to a rolling futures contract over 4 years highlighted a 126% difference in return.



So, in addition to a limited selection of ETFs I recommend to my clients a range of Institutional Class index funds which allow investors to capture the market return at very low cost (for example a Global Equity fund with around 12,000 stocks in it for 0.5%pa TER) and to tilt their portfolios towards Global Smaller Companies and Global Value companies or European Smaller Companies or European Value Companies or Emerging Markets or Emerging Market Small Companies or Emerging Market Value Companies.


Since these are all specific positions of additional risk, and since risk and reward are related, over time, these are investments that investors would expect to offer a higher return than the common commercial indexes such as the MSCI World and indeed this is what they have consistently delivered.
 
Nasher, I would echo Bogles advice above.You may not be in a position to avail of Marcs services but reading his posts is a good start.

Another book you might consider is "Smarter Investing" by Tim Hale. I found it easy to read and a real eye opener.
 
thanks for all the info a lot to take in seems to corralate with a lot of the literature i have been reading i will gladly read the books recommended i have read the little book of common sense investing by J.C.bogle you wiil understand where i was coming from on charges e.t.c. if you get a chance to read it thanks again.
 
the little book of common sense investing by J.C.bogle you wiil understand where i was coming from on charges e.t.c.

Excellent little book. Full of common sense. Alas I think Vanguards funds are only available to those with €100K or more to invest here in Ireland.
 
Unfortunately Vanguard funds are unavailable to Irish residents regardless of investment amount.I contacted Vanguard last year,and as far as I can remember it is for taxation reasons.
 
looks as if i may have to go the etf route as it may be the cheapest and the easiest way to get the broadest diversification i can get for such a small sum i also aim to hold for as long as possible and add to over time as i am a novice investor thanks again.
 
Similar to nasher, I have a small amount to invest (€5,000) and as a novice investor I was thinking about ETFs. Several financial experts representing different Irish stockbrokers on the Sunday Business Show (Today FM) pointed to ETFs as a good low-risk investment, and also suggested that now would be a good time to invest in Irish government bonds. I would be looking at an investment period of 4-5 years.

[FONT=&quot]Looking through previous threads, I am wondering about hidden costs associated with ETFs. I was trying to get up-to-date information on management costs for Irish stockbrokers, and which one would be the best to approach given my current needs. Would Davey online be suitable for this type of investment? It’s difficult to get up-to-date information on management fees etc.- the only IFSRA survey I could find was almost three years old, and is difficult to apply to personal circumstances. Previous posts have mentioned UK and US based stockbrokers as representing good value (such as tdwaterhouse.co.uk, zecco.com, firsttrade.com) – can anyone comment on this way of investing? While I intend to become more educated in the area of investing, I’m anxious to shift this money out of a failing AIB savings account whose AER has fallen in line with the ECB rate. [/FONT]
 
Vanguard - Irish retail investors lose out

I was initially very excited to hear of Vanguard's decision to launch a range of index tracking funds on the UK market very recently. However, according to Nick Blake (Head of Retail Sales - Vanguard UK), the situation for Irish investors is not good:

Vanguard UK's UK funds are only distributable in the UK to UK residents. Vanguard UK's Irish range have distributor status in many countires, but notably not the US and Ireland. In both cases this is because local taxation arrangements could have a detrimental effect on the funds.

Irish retail investors are losing out badly. I find this both saddening and perplexing as we have to, in the meantime, continue to pay up to 10 times the annual management charge to passively track a stock market index here in this country.

In the fund management business, costs matter - they matter a lot. As such, I am truly astonished that this topic isn't getting more air time.


rat
 
Re: Vanguard - Irish retail investors lose out

There are a couple of reasons for this I think.

1: International equities are not an important asset class for Irish investors. They should be, but they are not. In my experience, Irish investors (both retail and institutional) had an unhealthy obsession with all things Irish. A country that should not have represented more than say 2%/4% of a diversified equity portfolio usually represented 20%+. Consequently, for the number of retail investors that would be interested in a cheap (non-Irish) tracker is not large, so there are not enough people around to make a fuss.

2: The crop of financial journalists who write for Irish newspapers are on the whole an uninspiring lot. They tend to rely far too much on corporate press releases and are really only reporters - not journalists in the true sense of the word. Normally, you would need these people to raise awareness of issues such as the one mentioned above.

3: Perhaps the most important point is that property has traditionally, and still does, absorb far too much attention from the Irish when it comes to pensions and investing. Equities always seemed to be the least interesting asset class, particularly in the aftermath of the dotcom crash.

4: Inertia. I know far too many people who leave the management of their investment in the hands of advisors who mainly buy from Irish institutions.
 
Re: Vanguard - Irish retail investors lose out

This is a debate I would like to hear more about. Is there any good value funds available that, for example, track or buy the S&P500 ?

Another reason for this the fact we cant get objective financial advice here, without been sold the same stuff everywhere, with little will to compete on charges.
What is within our tax system thats so repelling for such companies?
Can you not invest in their UK arm?
 
Re: Vanguard - Irish retail investors lose out

This is a debate I would like to hear more about. Is there any good value funds available that, for example, track or buy the S&P500 ?

Another reason for this the fact we cant get objective financial advice here, without been sold the same stuff everywhere, with little will to compete on charges.
What is within our tax system thats so repelling for such companies?
Can you not invest in their UK arm?

I am in the process of moving my pension into a self invested pension plan (in the UK). I plan to get assEt class exposure via ETF and trackers. There must be literally dozens of cheap S&P trackers out there. As I mentioned Vanguard are know for being cheap. Ditto ishares and Lyxor. I will post my findings back here in time.
 
Re: Vanguard - Irish retail investors lose out

Note that:
1. Vanguards funds funds must be bought through fee based IFAs who may charge an additional 1% for the service.

2. Vanguard will accept direct investments from investors of minimum £1000,000 per fund.

3. Online brokers TD Waterhouse will not be offering them on their low cost platform as V will not share fees, other brokers are awaiting developments.

4. Lyxor FTSE AllShare ETF 0.4% Annual Mgt Fee

5. Vanguard FTSE All Share 0.15 AMF


Ref: FT Weekend Money June 20th/21st

C
 
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