General fund charge question

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whatsmoney

Registered User
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Hi there.

If a fund advertises that it makes a 10% gain the previous year, is that 10% the value the fund has increased before or after managemnt fee and bid/offer spread are counted?

For example, if you invested in a fund that had a 1.5% management fee and a 5% bid/offer spread, does that mean that the fund in fact grew by 16.5%the previous year and then the fund managers took away their slice?
Or does it mean that your gain is 10% - 6.5%, ie 3.5% over the previous year?

If you are investing in such a fund, does it mean that the fund must grow by 6.5% before you get any return on the fund? If it grows by less, are you in fact losing money?

A very basic question i know, but something i want to clarify for myself, a novice!
 
Depends on how the fund manager quotes the result. I think that they normally report the result before deducting the mgt charge on a bid to bid basis ie without taking into account the initial charges of a 5% bid/offer spread.

Remember that the 5% spread, if there is one - not all funds use this - is a one off charge and not a recurring annual charge.

But yes, in the example you quote, the fund has to go up by 6.5% at least in the first year if you want to break even. On a long term basis, the 5% will spread over the number of years you hold the investment.
 
Hi jpd,

I must not fully understand what a bid/offer spread is.

I assume that when you say that it is a one off charge, you are speaking about it as a charge on a fund that you put a lump sum into?

On the other hand, if you are putting say 100/month into a fund, does that mean that only 95/month is invested, and the remaining 5/month is kept by the fund management as a 'charge'. I always assumed this was how bid/offer spread worked.

Basically what i'm asking is, how does a bid/offer spread work for a fund where one is contributing monthly?
 
A fund that quotes a bid/offer spread quotes two prices for a unit at any time - the bid price and the offer price. Typically there will be a 5% difference between these two prices.

Let's say you buy 100 units at €1 each. If you were to sell them back on the same day, you'd get €0.95 for them, so it would be a 5% charge. If you hold your 100 units for a while until the price doubles, the price you will sell them back will be €0.95 x 2 = €1.90.

In effect it's a 5% charge that's applied once when you buy units.

Liam D. Ferguson
www.ferga.com
 
So in effect, for a fund where you are regularly contributing eg monthly, you can basically add the bid offer spread charge to the annual management charge and that is in effect the real annual management charge for that fund. ie in my example 6.5%.
It seems to me to be very devious to quote an annual management fee of 1.5% whereas in effect it is 6.5% when the extra charge is added.
Or am i wrong in coming to this conclusion!?
 
And on top of that, when the fund managers say the fund grew by 10% the previous year, they quote this before charges, so in effect your gain is 3.5%!!!!!
Surely I must be wrong in this!!!!!
If not how can fund managers/providers get away with such claims!!!

Why would anyone invest in such funds when you could lose the money you are investing aswell!
The banks regular monthly savings rates seem to me to be a much better option when the risk of falling equity prices is taken into account.
 
Your conclusion is wrong in that the bid/offer spread is only effectively levied once on each contribution. The charge you describe is 5% of each contribution, and then 1.5% of the fund annually.

In the second year, the only charge on your fist year's contributions is the 1.5% annual management charge. In the third year, the only charge on your first and second years' contributions is the 1.5% annual management charge, and so on.

Liam D. Ferguson
www.ferga.com
 
A simple way to se the charges effect is to assume you invest and there is no change in the price.ie no growth or fall.

Assume price of fund is €1 per unit with bid/offer 5% and annual charge 1.5% of fund.

If you invest €100 per mth = €1200 per year and then sell after 3 years.

Year 1: You invest €1200 , this buys 1140 worth of units ( 1200*.95). Your charges are 1.5% of 1140 so your net balance is 1123.
Year 2: You invest €1200, this buys 1140 units. Charges are 1.5% of (1123+1140) = 34. Net balance is 1123+1140-34= 2229
Year 3: You invest €1200, this buys 1140 units. Charges are 1.5% of (2229+1140) = 51. Net balance is 2229+1140-51 = 3318.

So you invested 3600 but if you exit you get 3318.
To just get back 3600 the fund price would have needed to have grown by about 2.8% per year since you started. And of course, this is not breaking even as you would have got bank deposit interest.

I always think a good question to ask a broker is "what will my fund be worth if I withdraw it in 5 years assuming there is no change in the share prices in that period." This gives a good starting point for understanding charges.


Going back to your original question:
Don't think of the 5% as being added to the 1.5% each year - it is for your new money but not for your old money thats in the fund from last year. The longer you leave it in, the less significant the 5% becomes.

I always thought the 1.5% management charges have already being taken out of the fund growth figures but I am open to correction. I know it is for the Irish Life Consensus Fund I deal with.
The bid/offer 5% effect would not be reflected in the growth figures published.
And yes, they are all devious when explaining charges figures though its not as bad as in the past. You would not have wanted to be dealing with them in the 1980's.
 
Incidentally, on any savings, investment or pension illustration from any of the life assurance companies, there should be a Reduction in Yield (RIY) figure quoted. This is a useful figure in that it expresses all the charges in the form of the effective reduction in the annual fund growth.

So in other words, if the fund grows at 10% and the RIY figure is 1.7%, that means that you actually see 8.3% growth after all the charges, including bid/offer spreads, policy fees and whatever other device is used.
 
Whatsmoney,

If you recently put the plan in place, you should have received the 'disclosure' quotation with your policy document which will give you the RIY that LDF refers to.

For example, if you invest €500 per month and there is a 1.25% AMC, a 5% charge on contribution and a policy fee of €3 per month the RIY would be in the region of 1.8%.

If the fund grew by 6% per annum you would see just 4.2% of it.

I have assumed a term of 20 years in the example.

Some product providers may reduce charges in later years or give some form of bonus after a certain period of time. These reductions/bonuses would be reflected in the RIY percentage.
 
THanks for your valuable info folks.
I am not invested in a fund (apart from my AVC one) but after learning the above I'm thinking the best approach would be to find out the makeup of the
best performing funds, like the irish life consensus, ie. what companies they are invested in and the percentage of the overall fund, and then mirror it in a personal portfolio but buying the shares myself. I would also get dividends that way. i know i won't get an exact picture, but the fund advertisement doc. does show what funds they are mostly invested in.
Could keep an eye on changes in the fund makeup yearly, i doubt tha fund managers do a lot of share buying/selling for the most part in the medium/low risk funds.

I did get stung with an Ark Life PEP some years ago, so that does explain some of my scepticism re fund managers/charges and poor performance.
 

thanks very much, this is a very good post. But just to confirm things for me.

Let's say, a deposit account for them 3 years was 'performing at 5% the fund would have to perform at 7.8% to match the deposit account? So that would be a RIY of 5%?

For what it's worth I don't think QL offer the 5% spread charge which makes theres somewhat good, well better than the example quoted above...
 
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