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Costly Funds - keeping costs down
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ynys
Posted: 26 February 2013 02:10:41(UTC)
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Funds these days, in the UK, tend to mean unit trusts (on their way out fortunately) and oeics. Anyway so when are funds costly? Having given it a little thought, I would suggest, when there is a high annual management (over 1 percent ?) for a straight forward fund of UK shares.

High annual management charges (amc) also referred to as ter, when extra costs are taken into account, bite when you have large holdings. One percent of 100,000 pound is 1,000 pounds. If the amc was only 0.5 percent you'd save 500 pounds per year.

Now there are occasions where OEICs purchased within an ISA may be reasonable value. IE when the fund offers some sort of specialisation. Eg investing in particular parts of the world; bond funds where income tax relief cuts in; more complex funds offering enhanced income through various techniques . . . so it may be wrong to neglect oeics where they are tailored to your more specific needs.

Large Investment Trusts may well help reduce costs for large holdings of straight forward UK or general international trusts. Of course you could by UK shares yourself and pay no one to manage them cutting down on amc all together, bearing in mind though, you ought to buy at least 1,000 per transaction to keep dealing charges down, you would want a holding of 5 or more for at least some degree of diversification (so you don't get destroyed if a particular holding goes up in smoke) and you would be well advised to pay more attention on how your shares are doing.

Just a few thoughts, any other ideas appreciated.
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Alan Selwood
Posted: 26 February 2013 03:10:04(UTC)
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Diversification to reduce company-specific risk = approx 20 shares. In most years, more holdings become statistically insignificant; fewer holdings start to increase the overall volatility too much and put you too much at risk of company insolvency.
Back around 1980, when we had a fairly severe recession, about 3 companies per year went belly up out of a fund portfolio of around 500 smaller company UK shares I had then. This mattered not a jot.
The rules governing unit trusts when I was in that type of business insisted on maximum percentages in any one company, and 20 x 5% holdings would have just scraped within the rules.
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ynys on 26/02/2013(UTC)
ynys
Posted: 26 February 2013 23:44:37(UTC)
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Thanks I agree 5 shares would amount to very limited diversification. Twenty would hard to achieve for most investors starting out. Buying in amounts of 1,000 at a time, 10 would fill one years ISA allowance.

Maybe following u'r arguments, one should start out with funds and consider exchanging them for a portfolio of individual shares at a later time.
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Jon Edwards
Posted: 27 February 2013 00:45:16(UTC)
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Not all funds are charging as much as you say. Vanguard equity funds for example have TER's as low as 0.15% for a fund that tracks the FTSE All Share Index. However as they don't pay commission most brokers will charge you a platform fee of some description (TDDirect charge 0.35%, BestInvest and HL charge a flat rate I believe). If you're talking large holdings, the flat rate would probably work out cheaper.

Broker charges need to be taken account with shares as well as they can certainly add up.
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ynys on 27/02/2013(UTC)
Alan Selwood
Posted: 27 February 2013 01:38:02(UTC)
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If the total investment capital is insufficient to allow 20 holdings without each one being uneconomically small, it would make sense to buy one holding of a cheap generalist investment trust.
Once there is sufficient capital later to spread over 20 shares (around £50,000 to £60,000 in all?) you could then replace the single IT with shares. However, unless you are an ace with stock-picking, it may be better to purchase another IT every time another £10,000+ is available.
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ynys
Posted: 27 February 2013 23:17:01(UTC)
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Tracker funds are certainly one way of keeping down costs for a simple basket of shares. I doubt if anyone would go far wrong by investing in tracker funds but they wont, ordinarily, cover areas such as, say, high yield bond funds . . . emerging markets etc. As u mention some brokers seem to have declared war on tracker funds with their 'platform fees'. Maybe an ISA with, say, HSBC would be good for tracker funds

Thanks for putting some flesh on the bones of u'r idea of holding a well diversified portfolio of shares. I think u'r reasoning is pretty sound.

I'll be making some changes this year, probably staying with HL since u can invest in shares, IT s and etfs – not just (closed end) funds; though I deplore their platform charges (u can't have everything I guess). But I will be looking at any funds which do little more than offer a simple basket of uk shares and see if there are lower cost, better value alternatives

Regards
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Martina on 27/02/2013(UTC)
Jon Edwards
Posted: 28 February 2013 14:20:58(UTC)
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True but there is a growing number of trackers in more specialist areas. For example, in emerging markets you have L&G Global Emerging Markets Index (TER 0.488% on the I class shares) and Blackrock also have one. If you include ETF's, which are generally tracker funds, there's a bewildering array to choose from...

I think 'platform fees' is something you're going to see more of depending on how the FSA go with regard to commission on execution only services.

For example TDDirect are visibly charging platform fees on all funds now. If you hold commission paying funds the trail commission (normally 0.5% p.a.) is rebated into your account and the platform fee is taken out of that - and you keep the rest. If the funds are 'clean' (non commission paying) then the platform fees have got to be found from somewhere else. You can currently buy clean or commission paying versions of quite a few funds through them. As a typical example you can buy First State GEM Leaders in class A or B shares, with B being the 'clean' share class. It has a TER of 0.91% on the B shares and 1.58% on the A shares.

HL don't seem to have made any changes yet, as far as I can tell.

Ultimately running a fund platform has a cost, and always has, it's just a different way of splitting out those costs.
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Dennis .
Posted: 03 March 2013 17:17:55(UTC)
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Have a look at Fundsmith and hold it directly rather than through a fund supermarket. Low charges, good performance and no frills. just investing in solid boring companies that keep generating cash and growth. www.fundsmith.co.uk/TheFund.aspx There is a video on the site explaining the methodology which is well worth listening to.
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