Total Expense Ratio for Irish unit funds - Quinn Euro Freeway

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darag

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The difference between a (total) expense ratio as opposed to an annual
management charge in regard to unit funds has been raised in a couple of
threads recently. The former is often quoted for "mutual" funds in the
states and is nearly always quoted for ETFs; it is supposed to give the
total cost of administering the fund including trading expenses,
management charges, custodial expenses and everything else. In Ireland,
things are slightly less transparent as the life companies don't seem to
have a statutory obligation to quote a TER and most often quote a
management charge but are seemingly allowed to charge many other
expenses against the fund - for example trading expenses.

I thought it would be a useful exercise to try to work out the actual
total expense ratio of a unit fund and compare it with the quoted
management charge. This is not possible for most unit funds such as
managed funds, consensus funds, etc. as you need a benchmark to compare
the performance of the units against. Really it is only possible for
trackers of well known indexes which have publicly available historical
data. You also need some historical unit prices for the fund. Because
I own some, the fund I picked for this exercise was Quinn's Euro
Freeway which is publicised as being a DJ Eurostoxx 50 tracker. The
Stoxx web site has daily historical prices for the index and I rooted
through some old statements of mine to get historical unit prices for
the Euro Freeway. Unfortunately I only have three unit prices with a
gap of about two and a half years between the newest and the oldest.

The initial results are very favourable - over the period in question
the "lag" of growth for the units seem to be around 1% annualized
compared to the index which means that Quinn are indeed offering
excellent value given that the expense ratio of the underlying ETF is
probably more than .25% per annum.

However I would like to widen the window a bit before drawing a definite
conclusion. Does anyone have old unit prices for the Euro Freeway - pre
2003 for example? The older the better.
 
If I recall correctly the EBS Summit Funds annual report (these funds actually being UCITS) contains detailed information allowing insight such as this into the actual costs involved in managing the funds. I must check the last report that I have later this evening and see what I can glean from that and how it might relate to the quoted management charge.

The [broken link removed] has some historical prices in case they are of any use?
 
One problem with the analysis I did was that I only had about 3 years of unit prices. If someone could check their old statements and post unit prices for QL Eurostoxx 50 from as early as possible (my earliest is 2003) and as recently as possible, I'll feed them into the spreadsheet again and compute the TER versus the DJ Eurostoxx 50 (Return).
 
To calculate the TER just get the annual report that you should be entitled to if you are an investor. All the expenses outside of the annual mgt fee will be listed.

I know it sounds like a cop out but the there is usually very little difference between the additional expenses between one fund and another. Custodial trustee, audit very competitive industries. On funds I have looked at the expenses usually range from 25bp's to 50BP's depending on the size of the fund. Sometimes the mgr swallows some of the expenses from his Mgt fee to make the TER more competitive (ex-Ireland obliviously).

Investors rarely query the Size of the fund and this can have a very dramatic effect on your costs i.e proportional effect of fixed costs and the far more punitive Dilution levy. I have seen inflows into small funds been hit with D.L's of 1%.

I agree with your main point the TER is what should be used as the standard measure of costs but the difference between similar fund TER’s is usually always down to differences in their annual management fee. One other drawback of the TER is that it is historical you cannot say what it will be next year as allot of the expenses are variable and function of the next years dealing.

On your analysis you are looking at tracking error the difference between a b/mark indices and a fund, which has a lot more to it then merely expenses. Is it replicating the underlying assets exactly or 90%? . What about dividends, WHT, cash transactions, unit fund pricing times dealing charges. What I am saying tracking error is not just the TER. . Whoever was told the TER was the annual mgt fee was misinformed. In my experience most people working in this industry don’t know what a TER is let alone the investors they are advising.

 
On your analysis you are looking at tracking error the difference between a b/mark indices and a fund, which has a lot more to it then merely expenses. Is it replicating the underlying assets exactly or 90%? . What about dividends, WHT, cash transactions, unit fund pricing times dealing charges. What I am saying tracking error is not just the TER. . Whoever was told the TER was the annual mgt fee was misinformed. In my experience most people working in this industry don’t know what a TER is let alone the investors they are advising.
Click to expand...
The index I am benchmarking against is the "DJ Eurostoxx 50 Total Return" index as opposed to the corresponding "Price" index. I would imagine that for a unit fund of this nature the dealing charges for Quinn are minimal since they probably just buy (and very rarely sell) shares in an ETF. They could use the corresponding iShares EFT, for example, which has a TER of around .15%. My understanding is that this ETF would have a minimal tracking error given its size. I imagine that Quinn simply pocket an additional .85% from the fund allowing them to quote a "management charge" of 1%.

Like I said, I think that my window for analysis is too small - I have only 4 prices for the Quinn units spread over a 2.5 year period. However the results are fairly consistent in that time frame.

Actually I've just noticed something. While the iShares site describes SX5E as the total return index for the Eurostoxx 50, I think this is an error. Bloomberg claims that SX5E is the price index, while SX5T is the total return index. A historical price comparison would support Bloomberg. I'll have to check that I've benchmarked Quinn against the proper index later.
 
Sorry SPC100, I missed it when you posted.

No need for a spreadsheet actually. The data is easy to compare.

The EURO STX50 (total return) benchmark can be measured using the Bloomberg symbol SX5T and Quinn provide unit prices online.

Note the Bloomberg symbol is a benchmark index, the corresponding iShares ETF for example is advertised as having a TER of about 0.35%.

The longest period as possible given the prices available on the Bloomberg and Quinn websites is: 19th April 2006 - 12th April 2011 (almost five years).

On those dates the Quinn unit prices were 1.10325 and 0.941914 - a decline of 14.62% or 2.78% annualized.

The SX5T index was 5365.73 and 4846.89 - a decline of 9.67% or 1.87% annualized.

So it looks like Quinn, for all my other concerns, do actually deliver a TER of about 0.9% if they were to simply resell the ETF. If not they may have benefited from some tracking error in their favour.
 
Some of my old posts in this thread were deleted as my account was hacked and spam links posted. Anyway to finish off this thread about QL Euro TER/index tracking error.

This Quinn Life fund were transferred to a new fund in Irish Life on 16th-Sep-2012. So I thought it would be interesting to calculate index tracking error over the largest period of time we have data for. i.e. using Darag's data starting 19-april-2006.

4,537.37 4was the value of 5x5t on 14th Sep 2012
.8608402 was the value of the QL Unit at transfer 14th sep 2012

Using this
http://www.timeanddate.com/date/duration.html
19-april-2006 to 14-sep-2012 is 2341 days (6 years, 4 months, 27 days)

Using this
[broken link removed]
Total Index Return -15.438%, Annualised return -2.581%
QL total return -21.972%, Annualised return -3.795

The QL fund over this date range underperformed the index by about 1.2% per year in total.

Considering that we frequently hear that TER can be 2 or 3 percent, I am delighted with this. and it collates well, with what I was told by QL staff, which was they used an ETF and applied a mgmt charge on top.

So, this appears as if Quinn Life Euro Fund was one of the good funds which treated customers fairly.

I wonder will Irish Life track their Index as closely.

(it would be interesting to also try other dates to see if they get similar results)
 
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In case anyone would like to do another calculation I have unearthed the figure for the euro fund on 26/01/04 as .81137
and 12/08/2003 as .69775
 
However DBX trackers have a EuroStox 50 ETF with a TER of 0.00% pa


[broken link removed]

This means that by using an Insurance Company you are paying a full 1%pa extra for just 50 stocks.

Is this really good value? For some people with small amounts to invest each month maybe but possibly not so clever for larger lump sum investors.
 
Marc said:
However DBX trackers have a EuroStox 50 ETF with a TER of 0.00% pa
Click to expand...

Marc, where is the trick here ?? How do the providers of this product make their money if it has a 0% fee structure ?
 
Hi Merc,

"trick" is the right word to use.


From DBX Trackers own guide to ETFS.

"With swap-based ETFs, UCITS rules provide that the ETF’s exposure to the swap counterparty must be kept within specified limits. As a result, the ETF will normally have access to physical assets, either in the form of a basket of securities (where the swap is unfunded) or in the form of collateral (where the swap is funded) which will effectively reduce the exposure to the counterparty. Such physical assets are set aside with a third party custodian on behalf of the ETF. In the event of the swap provider failing in its commitments, the assets can be liquidated as compensation or as the basis for entering into a new swap agreement with another provider. The risks in swap-based ETFs – default of a counterparty, a reduction in the value of assets which are available to the ETF if the counterparty defaults – are similar to the risks that arise in respect of physical ETFs when they engage in securities lending."

So, in English, in this ETF the investment bank (in this case Deutsche Bank) gives the ETF access to a "basket of securities" which are selected by them as security for the ETF and it swaps the return on these securities for the return on the EuroStoxx 50.

A full list of the securities held as collateral by the ETF is published by DBx here



So, in practice you are indirectly holding 36 securities which bear little direct relation to the 50 you thought you had purchased (I wasn't aware that either the USA or Japan were in Europe!). The ETF manager then engages in derivative transactions to swap the return on this basket with the return on the Eurostoxx 50 index.

There is a whole lot more voodoo going on, all of which enable both Deutsche Bank and DBx to make money from the various transactions involved.

As an interesting observation what if Quinn life had used DBx Trackers to offer "their" Euro Fund?

In this instance investors in the QL Fund would have swapped the relatively tight UCITS regulation of the underlying ETF (which as we can see bears little physical relation to the underlying index) and swapped it for a "mirror fund" which would see them on the balance sheet of Quinn Life and therefore as creditors of Quinn Life - a double whammy of counterparty risks.

I haven't looked in detail as to who the ETF provider for Quinn is/was.
 
Marc, very informative. However where do they state on their prospectus sheet, that an Investment in the said ETF is actually becoming involved in SWAPS, whether it is direct or indirect ?

I do stand to be corrected but surely they are obliged to place all of this information in clear and understandable print for the Average investor and not the experts like you who know and understand the small and invisible print.
 
Merc,

To be fair to DBx the fact that this is a swap based fund is all over the website and documents.

I think the key issue is that many people would have difficulty understanding the implications of this.
 
Marc, I am unable to see where there is any mention of this been a Swap based fund on the sheet you provided.
 
Look under fund information and portfolio structure - it's as clear as day what that means surely. I am of course being sarcastic here.
 
Maybe, to real seasoned Investors, but to the average Joe or in fact a normal fund adviser, difficulty could arise.
 
Marc said:
However DBX trackers have a EuroStox 50 ETF with a TER of 0.00% pa


[broken link removed]

This means that by using an Insurance Company you are paying a full 1%pa extra for just 50 stocks.

Is this really good value? For some people with small amounts to invest each month maybe but possibly not so clever for larger lump sum investors.
Click to expand...

FYI, The Quinn Life fund discussed here no longer exists. I believe Quinn was using an ETF for the underlying investment, and taking the margin difference for themselves.

Due to the weak irish regulation, which does not require publishing TERs, I feared, that there might be an effective TER of 2 or 3% on this fund. I was and still am delighted to see that it actually looks like my cost was only 1% p.a.

In terms of the index tracking in the Irish Market *in hindsight* this was a very good product, especially for someone who is dripfeeding into it (or a set of diversified index tracking funds), and especially before the 8 year deemed disposal.

I love ETFs, but we have to acknowledge, that in addition to the lack of suitability for small regular investments, the extra charges to have your own crest account, we also have an unclear tax risk and a possible heavy paperwork burden.

Any chance, you would get the values of your proposed etf on the same dates as I used, and I can calculate what the return would have been vs the actual index and QL? (in theory if it's tracking error over that time was weak, the cost would be higher than 0%)
 
Hi SPC

This is not my proposed ETF by any stretch of the imagination I was just making the point that it is/was possible to obtain the same underlying return with no annual charge. Of course any tracking error will amount to an effective cost and your approach is the only way to assess the true cost of ownership.

You make a good point which is that for any particular investor, their personal circumstances will dictate which is the "best" solution.

I am just drawing attention to the fact that you would need to be getting at least 1%pa value from Quinn plus of course a 1% upfront levy.
 
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