index tracker funds and charges

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=&quot]“ 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=&quot]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]
 
The Truth about Investments and what they don’t want you to know

The Investment Companies in Ireland and the Funds Managers do not want their customers / investors to know this information. They simply are worried that if their Investors learn and realise this information, possible drastic action will be taken.

When an Investment is made into any of the Investment funds based in Ireland, we are led to believe that the only charges applicable are Management Charges, which are charged from 1.25% to 1.75%, annually, depending on the fund.

The real costs applicable to each fund are included in the TER (Total Expense Ratio). These are the charges made to each fund but the Department of Finance has deemed it unnecessary for the Financial Providers to display these costs to the Public. Although in most European Countries and the USA, these charges are mandatory and are displayed in clear Bold Print, In Ireland it is deemed as unnecessary.

These are a measure of the total costs associated with managing and operating an investment fund. These costs consist primarily of management fees and additional expenses such as trading fees, legal fees, auditor fees custodial fees and other operational expenses. The total cost of the fund is divided by the fund's total assets to arrive at a percentage amount, which represents the TER

The size of the TER is important to investors, as the costs come out of the fund, affecting investors' returns. For example, if a fund generates a return of 7% for the year but has a TER of 4%, the 7% gain is greatly diminished (to roughly 3%).

Coupled with these costs, there are other costs. These include the 12b-1 costs which normally annually amount to 0.25% – 1% and are associated with the costs of marketing and advertising to attract new investors. However existing Investors are paying these costs and in the Irish market appear to be part of a Hush Hush campaign. There are also fees known as Sales Loads which are near impossible to source information as an exact cost, but be aware that as an Investor you are paying for the Costs of Sales to the fund.

The writer has requested the details of these costs from the Providers. However in the case of Irish Financial Providers the facts have been withheld, but in some cases, of funds run by overseas companies they do offer the figures, but in most cases after huffing, puffing and a variety of excuses.

So Investors, bear these facts in mind. When one wonders, why, when they see the markets move forward they wonder as to why the funds are not moving with the same pace. The same principles affect the downward spiral in the markets. Now you know the reasons. The Investors within the funds are paying for these charges, and if you ever wondered how and why the Financial Providers make such vast profits, now you know why.

But in Ireland the people that make the rules, think and say you don’t need to know.

Make up your own minds and in the case of any future Investments, explore all your options available in the markets but ‘DO YOUR OWN RESEARCH’
 
Hi mercman

Interesting. What does MiFID say about the disclosure of TERs?

Can you provide a link to a fund in the UK where the TER is disclosed? Ideally if it was from a UK company with a fund marketed in Ireland so you could do a comparison.

I remember some years ago asking Quinn Life for TERs on their trackers and they seemed very low. The quoted annual charge was 1% and the TER didn't add that much too it.

It's important to remember that people who invest directly in shares also incur charges equivalent to TERs in that they pay stamp duty, dealing charges and possibly, custody charges.

Here is another interesting post which deals with Quinn Life and TERs
These include the 12b-1 costs which normally annually amount to 0.25% – 1% and are associated with the costs of marketing and advertising to attract new investors
Click to expand...
It surprises me that the cost of advertising is borne by the existing investors. Are you sure of this? What does 12b-1 mean in the Irish context? It is presumably a section of some Act or regulation?

Has the Financial Regulator or, now, the National Consumer Agency commented on TERs? They should do so.

I think that Eddie Hobbs used to talk about them some years ago which was one of the reasons that he used to promote overseas funds with much reduced TERs.
 
Brendan,

The easiest way to check the TER on UK funds is to pick a company operating funds and read their funds fact sheets. These show the AMC and the TER.

Here is an example where you can choose any of the funds operated and check the facts: http://uk.standardlifeinvestments.com/consumer/our_funds/oeics_and_unit_trusts/our_equity_funds.html.

Persons investing directly are not subject to the Annual Management Charge, although they are subject to the fees.

The 12b-1 is an industry term used and implemented worldwide for the costs as detailed.

Agreed the Regulator should make it implicit and a necessity of showing these charges. No comment from them as yet, although I do see it of paramount importance that these matters are addressed ASAP.
 
Hi Mercman

Very interesting. Can you find the same fund sold by Standard Life in Ireland and the UK?

If they give this information in the UK, it's odd that they don't give it in Ireland. Although it would be very difficult for Standard Life to sell a fund saying that the annual charge is 3% if everyone else has to quote "only" 1%.

Brendan
 
Did some leg work this week and have found from my Actuaries that the Sales Loads are borne by the funds which investors are paying for. As for the 12b-1 fees they are also part of the fund and present investors are paying for the costs of Promotions and Advertising -- Brilliant isn't it ???

But if you are in funds and don't like what you read, you are not a prisoner, Look around and as stated previously DO YOUR OWN RESEARCH, unless you really want to pay for everybodies bitz and pieces in running a fund.
 
The following is an extract from the Interim Figures of Bank of Ireland Life which includes the income from their Investment subsidiaries including New Ireland Assurance. On the basis that they are simply in the main Managing money these figures aren't bad, although if you (like me) are unfortunately an Investor in their funds or Pensions, we are helping the BoI with the only profits they are making at present. God I feel brilliant knowing this !!!

Operating profit increased to €31 million for the six month period ended 30 June 2010 compared to an operating profit of €3 million for
the six month period ended 30 June 2009. New business profits were €3 million for the six month period ended 30 June 2010 (€nil for
the six month period ended 30 June 2009) due to an increase in sales volumes. Existing business profits were €34 million for the six
month period ended 30 June 2010 compared to a profit of €8 million in the six month period ended 30 June 2009. While retention rates
were lower in the existing business book than the long term assumptions, the retention rates improved in the six month period ended
30 June 2010.

The full presentation of the Interim figures are here: [broken link removed]

It is long and tedious but worth it if you are questioning your investments or pensions. As well as these there are more revelations due to come out in the Public Arena in the next month or so.

Make your own minds up.
 
I put the query about TERs to a portfolio manager in Zurich Life who confirmed that "Custodian fees etc. are levied on the unit funds themselves, with no further deduction necessary from the point of view of the individual client. These fees amount to less than 0.03% per annum. The Total Expense Ratio is made up of the current management charge applicable to the policy and the custodian fee."

So for, say, a product investing in Matrix Funds with an annual management charge of 0.75%, the TER would be 0.78%.

Liam D. Ferguson
 
Liam,

This where the problem exists. As brokers selling investments and if asked the charges within a fund, it is automatically answered by quoting the Annual Management Charge. This is in fact incorrect. The AMF is one of the charges made against any fund. the facts are that there are a number of Annual Charges applicable to any of these funds:
These are the TER which is made up of Annual Management Charge, Custodial Fees, Trading Fees and all the operational fees incurred within a fund.

Please refer to the posts of Marc and myself in this thread.

There are also the 12b-1 Fees which are the advertising and marketing fees within a fund.

And finally there are the Sales Loads fees which are paid from within the fund, which includes the commissions payable.

So as a Broker you are wrong to say that that the TER amounts to a small amount as you have stated, in the case of 0.03% in the Matrix Fund. Surprisingly when I asked Zurich, in writing as an Investor for the TER in the Matrix Fund, I was declined and refused any answer.

So in short the TER in funds differs in every fund. The more active trading within a fund, the higher the TER. Plus the 12b-1 and Sales Loads fees must be added to the Annual Management Fees. The Companies refuse to disclose these fees.

And Brokers should not dismiss a single random figure as the only charges applicable to any fund. Nothing personal, but in cases whence a question is asked by a customer of the charges applicable to an Investment, Brokers should give a truthful answer rather than a dismissive answer which is in essence a heap of Lies, something very evident in the Financial Services Industry.
 
Hi Mercman,

I thought I'd share the information I recently received on the Zurich Life / Eagle Star TER as TER was mentioned in the thread already. The TER as a measure is not intended to encompass all the costs a company incurs that you and Marc detail above. If companies don't make the information publically available, such costs can only be guessed at, so at present the TER seems to be the most comprehensive measure available, such as it is.
 
LDFerguson said:
TER was mentioned in the thread already. The TER as a measure is not intended to encompass all the costs a company incurs that you and Marc detail above.
Click to expand...

Liam, I am certainly not disputing the point you have made. To be specific, Investors are entitled to know the costs applicable to funds, not merely a 'Management Charge' which is a far lessor figure than the TER. The point and question is simply why aren't investors made aware of all these costs applicable to their Investments. The Department of Finance do not seem to think investors should know, although every other modern European and American countries deem it neccessary to publically enlighten Investors of these facts.

Moreover if one chooses to request the TER of any of the funds operated by Irish companies they are given a short change answer. Basically it's a need to know question and the Irish fund operators deem that Joe Public does not need to know.

The most pathetic part of this is that the Consumer Code states many dos and donts but in reality for those working in this market, the information concerned is not passed to them or ultimeatly they are unaware of the facts, or in the main it is kept well away from them.
 
To be fair to Liam here he is mostly correct with what he is saying.

A Total Expense Ratio or TER is not a true statement of ALL the costs a fund bears.

The generally accepted definition of TER is: Annual managment charge, plus custody fees plus administration fees.

However, this "total" expense does NOT include trading costs (broker commissions, market impact costs, stamp duty and bid/ask spreads)

So, even if the legislation changed here in Ireland in the morning forcing all fund management companies to disclose a TER figure, investors would still not get the FULL picture of all the costs they are paying.

I think this is the point Mercman is actually trying to make.

For reference 12b-1 fees relate to sales loads in the USA only.
In europe the equiv sales charge would be a bid offer spread and/or (ie sometimes both) a reduced intial allocation to units. The effect is exactly the same, the investor takes a hit day one to pay the sales commission.

Out of interest, where an investor gets a 100% allocation (or even more) there will still typically be a sales charge but this will generally be hidden somewhere in the annual fees paid by the investor.

At the extremes, some very strange voodoo can go on between the Actuary and the marketing department of an Insurance Company and this is at its worst in a single premium With Profits Bond.

I remember back in the early 90s being offered initial commissions of 6.75% for an investment bond with 100% initial allocation. The early surrender penalty in year 1 was a massive 8% (obviously to pay for the commission being offered)

So, even if you are offered a contract with a 102% allocation up front the provider would still typically want to pay me a sales commission.

Less well understood is that based on my overall sales volume with that particular provider, I would typically also receive an "override" commission. This is an additional payment which is typically never disclosed to individual clients but which is paid as an additional commission payment.

Consumers should therefore always ask themselves, "if I am getting a "free" 2% upfront where is this additional commission being paid from?"

Logically, it must ALWAYS be paid out of the fees for YOUR contract. So, how much must you really be paying in total annual fees, expenses and costs?

This is the crux of this debate. In Ireland today, as an Authorised Adviser who is required by the Regulator to analyse all the available products and select the "best" for my clients, I am damn sure I can't answer these questions satisfactorily.

And to be clear, this is not because I am trying to hide my income (we operate on a 100% fee only basis) but because I can't get clear answers to these relatively simple questions.
 
Marc said:
For reference 12b-1 fees relate to sales loads in the USA only. In europe the equiv sales charge would be a bid offer spread and/or (ie sometimes both) a reduced intial allocation to units. The effect is exactly the same, the investor takes a hit day one to pay the sales commission.
Click to expand...

Marc, an extraordinary god post. However, I think you will find that the 12b-1 fees are incorporated as an instrument of fees in Ireland nowadays. Why do you think that the bid/offer spread is gone.

This is a pathetic situation in an industry that is completely flawed. And yet again Joe Public takes it sitting down.
 
For Index tracking funds, have you considered using index tracking error as a proxy?

I know a fund tracking an index can beat or trail the index, due to mechanics of trying to track the index, but, If there are significant hidden costs, with time, they should appear as an index tracking error.

I remember someone doing this as a manual exercise on this board for some of the Quinn Life funds.
 
For anyone who is reading the Vanguard parts of the thread, please note that Vanguard have started selling a couple of ETFs domiciled in Ireland, with very low TERs.

Also note that several ETF's are nearly exactly matching or even slightly beating their Index over several years. They can do this as a result of
-index replication skill (apparently, this is a recognized ability)
-making money from securities lending
-a lower actual withholding tax than the index calculations assume (due to being domiciled in an advantageous location)
-or holding something different to the index (eek!)

This makes a well chosen ETF, very good value by comparison to the typical Irish fund.
 
Interesting that the early parts or this thread were going on about market timing and suggesting that it was a "bad" time to invest in equities.

As it turned out it was within a month of the bottom of the market.
 
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