Use of ETF's in Pension

As a member of an occupational scheme, I pay 0.5% (no VAT) for a life company's global equity fund and nothing else (the employer covers the scheme's costs).

That's pretty good, isn't it?
 
Many thanks Marc but I have a couple of follow up questions.

The 1.193%pa figure is the annual compound difference between the total return of the Zurich Fund and the MCSI Japan Index (which includes all dealing costs and tracking error against the index) as calculated over a particular 10-year period - right?

Is the 1.193%pa figure inclusive or exclusive of Zurich's AMC and, if so, what is the AMC in this case? I strongly suspect the figure incorporates an AMC of 1% (which wouldn't be particularly low).

The Vanguard Japan Stock Index Fund Eur Institutional currently has an OFC of 0.23% and this covers administration, audit, depository, legal, registration and regulatory expenses incurred in respect of the Fund.

However, to allow me to make an apples-to-apples comparison with the Zurich Fund figure above can you also give me the annual compound difference between the total return of the Vanguard Fund and the underlying Index as calculated over the same 10-year period (so we are picking up all dealing costs, tracking error and the impact (if any) of stock lending fees)?

I appreciate the foregoing is entirely focused on product costs and ignores intermediary costs and commissions. Could you also give us some indication (even a ballpark range is fine) of the sort of set up and on-going advisory fees that you might charge a client?
 
Gordon Gekko said:
As a member of an occupational scheme, I pay 0.5% (no VAT) for a life company's global equity fund and nothing else (the employer covers the scheme's costs).

That's pretty good, isn't it?
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I've actually come across AMCs as low as 0.25% for passive equity mandates.
 
I should be ably to run exactly the same analysis in the morning and then we will have a precise number on a like for like basis.

Don't be fooled by quoted annual management charges this is the whole point of this analysis to demonstrate that the amc is meaningless
 
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Sarenco said:
Thanks Steven but I'm not sure I follow.

Are you suggesting that the AMC charged by Zurich is in addition to the OFC of the linked tracker? Surely that can't be right.

My understanding was always that the AMC charged by a life company incorporated all fund management costs (including the costs of any underlying fund(s)) but did not capture the full cost of the wrapper as other costs (custody, audit, director fees, etc.) are also applied to the fund units.

Why would Zurich's fund management team receive any element of the charges? They're not managing the fund assets in this case.

The lack of transparency in this whole area is really ludicrous.
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I don't know what charges are covered by the AMC and what aren't. There are certainly more costs that are not included the the 1% AMC. Maybe Marc knows more as he is closer to that side of things than I am.

Add in, there is no definition of TER so you can't even compare the charges covered under a TER if they are declared as they can include/ exclude different costs.

Steven
www.bluewaterfp.ie
 
People need to be more diligent around withholding taxes also...a lot of return is left on the table by some investment managers.
 
Marc said:
I should be ably to run exactly the same analysis in the morning and then we will have a precise number on a like for like basis.
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Super - that would be greatly appreciated. I wouldn't expect the difference to be material but I think it would be a worthwhile exercise nonetheless.

Marc said:
Don't be fooled by quoted annual management charges this is the whole point of this analysis to demonstrate that the amc is meaningless
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Sure, but if we don't know what AMC applied to the Zurich fund in your example, then we have no way of knowing what we need to add to that AMC to arrive at the true cost to the investor. Really without knowing what AMC was applied to the Zurich fund in your example, I'm not sure that the comparison would tell us anything very meaningful.

If my suspicion is correct that an AMC of 1% was largely responsible for the spread between the TR of the Zurich fund and the TR of the underlying index over the relevant period, then I can figure out roughly what I need to add to that AMC to arrive at a comparable OFC figure.

My industry contact suggested that I should add around 10% to the quoted AMC to arrive at the OCF for a unit-linked fund that tracks a DM equity index. That would seem to align with your figure showing the annualised difference between the TR for the relevant index versus the TR for the Zurich fund (allowing for tracking error, etc., of the linked tracker fund).

If we could establish that much then I think we could really advance the discussion.
 
"People need to be more diligent around withholding taxes also...a lot of return is left on the table by some investment managers."


Agree I've written a white paper of DWT and some funds just don't make any sense.

Like a Lux fund holding US equities and paying 30% tax rather than 15% for an Irish fund
 
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SBarrett said:
Add in, there is no definition of TER so you can't even compare the charges covered under a TER if they are declared as they can include/ exclude different costs.
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Thanks Steven but there is a pretty detailed ESMA Rulebook for calculating a fund's OFC (the artist formerly known as TER!). Essentially it covers all administration, audit, depositary, legal and regulatory costs - there's really not much controversy about what is, and is not, included.
 
Marc said:
Agree I've written a white paper of DWT and some funds just don't make any sense.

Like a Lux fund holding US equities and paying 30% tax rather than 15% for an Irish fund
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I suspect GG is referring to the DWT assumption made by the index provider (which is usually pessimistic) in calculating the TR of the relevant index and whether or not the manager actually bothers to reclaim DWTs where possible (they invariably do).

This is one of the reasons why it is not unheard of for a tracker fund to actually outperform its index. Stock lending income allocated by a manager to the fund is also important in this regard.
 
So I am updating my earlier post on a like for like basis (or at least as close as I can achieve)


Disclosures:

The comparison index used is different (Nikkei 225 for Insurance and MSCI Japan for fund)
The time period for the mutual fund is 10 years ending 11/8/2016. I can't use the same time period due to launch dates. ) I may update the original study in due course to cover the same time periods.


Zurich 1.193%pa 10 years ending 17/12/15
New Ireland 0.919% (same time period and from the same study)
Average 1.056%

The Vanguard fund returned 23.20% compared to the index return of 26.75% a difference of 3.55% or 0.34945%pa compound


Therefore the comparison with the unbundled contract is as follows:
Trustee and custody 0.40%
NAV reduction in return compared to MSCI Japan Index 0.34945%

Total 0.74945%pa

So a reasonably fair estimate of the difference between an Insured contact investing in a Developed Market Index fund in an Irish Pension compared to a Mutual Fund would be

0.30655%pa in favour of the unbundled contract.

Assuming an adviser charges the same fee as their commission then their cost should cancel out on both sides of the equation leaving the client better off by the difference in product costs.
Note that if an adviser charges a consulting fee but doesn't act as an intermediary then the fee would be subject to VAT
 
Thanks Marc but you're still not telling us one critical detail - the AMCs applied to the Zurich and New Ireland funds in your example.

Using your figures, the cost to an investor in the Vanguard Fund was 0.34945%pa compound (versus a current OFC of 0.23%), whereas the cost to an investor in the Zurich Fund was 1.193%pa compound (versus an AMC of X%).

Without knowing "X" the comparison is incomplete.

Life companies do not charge a single AMC to all investors in a particular fund. It is entirely possible that one investor could be charged an AMC of 1%, whereas another in the same fund could be charged an AMC of 0.5%. Therefore, it's critical to know what AMC is applied in your example.

Otherwise, you are only concluding that the additional cost of the life company pension wrapper over the unbundled contract would be 0.30655%pa on average.

The difficulty is that investors don't pay an average AMC - they pay whatever AMC is applicable to their individual contract.
 
Sarenco,

I see your frustration.

The data reported in Financial Express is the NAV of the fund NOT the contract.

The AMC disclosed by Zurich to Financial Express is 0.40%.
New Ireland did not disclose an AMC.

Therefore we should think of this as the wholesale cost of the fund.

Any additional contract costs are usually added by way of commission options and, as you correctly say, result in a myriad of differences in charges payable by investors.

However, if we are willing to assume that the underlying fund cost has been reported before contact fees which should primarily represent commission options, then we should be able to think of this as the "clean" or wholesale number.

If a broker adds a 0.50% trail commission or I charge an annual fee of 0.50% the effect on the net return should be the same.
 
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Thanks Marc - the "wholesale" number is exactly what I'm trying to get to.

So, in the above example the cost to an investor in the Zurich Fund, excluding intermediary costs, was 1.193%pa compound (incorporating an AMC of 0.4%). Is that correct?

And the comparable cost to an investor in a comparable fund using the unbundled structure, again excluding intermediary costs, was 0.74945%pa - right?

So that's a difference of 0.4435%pa.

Two final questions!

Can you tell us the OCF of the BlackRock index japan fund to which the Zurich fund is linked?
Also, is this fund denominated in euro?

I'm obviously trying to establish that the wholesale cost differential arises at the wrapper level rather than the underlying fund level.

Thanks again.
 
Yep, that's spot on.

I don't know exactly which fund Zurich would buy into
LU0938202743 has a TER of 0.03%pa and 10M minimum
LU0852473288 has a TER of 0.22%pa and 50M minimum investment

IE00BZCTKC13 has only just launched this year

These are all Euro share classes

I wouldn't get too hung up on the minimums as these can be waived at the managers discretion. We have access to a fund range with a minimum initial investment of €200M so I'm sure Zurich will have negotiated decent terms.
 
Thanks Marc.

It's certainly shocking that the true cost to the investor of the Zurich product was almost three times the disclosed AMC - for a simple DM index tracker.

It's bizarre to me that this situation is allowed to continue. Is it any wonder consumers don't trust the financial services industry?
 
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