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Struggling to understand difference between OCR & RIY
martin b.
Posted: 12 January 2018 20:23:23(UTC)
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I am struggling to get a grip on the relative costs of owning ITs. Up to now I have used the OCR which the likes of HL use as their standard. However the KIDs all use the "Impact on return (RIY) per year". Which is nearly always a lot more than the OCR. For example.

3in OCR = 1.5% RIY = 3.15
BBGI OCR=0.96, RIY=1.53
IEM OCR=1.1 RIY=1.48
RCP OCR=1.1 RIY=4.3 !!!

Yet for some trusts there is little difference eg
BEEP OCR=1.29, RIY=1.27
PNL OCR=0.95 RIY=0.92

I am beginning to think that the OCR is therefore very unreliable as it does not seem to cover the actual costs this seems to be especially true of RCP. I have emailed HL to ask about this but have not heard back from them as yet.

Mmmm, as I write this I wonder if some of the difference is because the OCR does not include any performance fee as I note neither PNL or BEEP do have such a fee? But looking at the RCP KID they give the management fee alone as over 2% so why are HL stating their OCR as just 1.1?

I would be very grateful if someone could help me with this, Thank you

Martin
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Jim S on 29/01/2018(UTC)
King Lodos
Posted: 12 January 2018 22:05:04(UTC)
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I'm glad they're detailing this.

With RCP, they invest in a lot of institutional hedge funds and private equity, which conventionally have a 2 and 20 fee structure (2% annual fee and 20% performance fee).

So they calculate 1.11% goes to external fund managers in annual fees, and an additional 1.18% on those funds' performance fees .. Then there's 0.44% carried interests on private equity.

They only take a 0.68% fee – plus interest 0.53% (assuming on the gearing) – that's the 1.11% OCR.

It's as far away from sensible passive investing advice as you can get (paying a 4% fee) .. Yale's endowment makes a similar 12% annual return to RCP, and that's how they justify paying 2 & 20 fees
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chubby bunny
Posted: 12 January 2018 22:24:08(UTC)
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Yes, it's due to the management and performance fees charged by the managers of all those hedge/private equity funds and investment trusts they hold. The Ongoing Charge also doesn't include financing/tax/transaction costs, amongst other expenses. It's rather shocking when you see it listed like that, usually these kind of details are squirrelled away in the annual reports.
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Don Revie on 12/01/2018(UTC), martin b. on 12/01/2018(UTC), Jim S on 29/01/2018(UTC)
Alan Selwood
Posted: 12 January 2018 22:41:16(UTC)
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All of which vindicates the attempts by some people in the industry to get ALL fees, charges, etc listed for ALL funds and trusts, so that the true total cost can be compared fairly.
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King Lodos
Posted: 12 January 2018 23:07:59(UTC)
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Like Yale's portfolio, RIT aren't profiting from those fees (assuming there aren't any special arrangements).

If they wanted to get the fee down, they could – they pay with their performance .. But you can imagine without highly active managers, they'd have a hard to time differentiating their returns from any open-ended fund in the mixed asset sector (most of which behave like expensive LifeStrategy funds).

What's unique about RCP is it behaves like an alternative asset, and if you're doing that through active trading and investing, that is expensive .. Whether it's worth it – Warren Buffett would say 'no', David Swensen would say sometimes 'yes'
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martin b. on 12/01/2018(UTC)
martin b.
Posted: 12 January 2018 23:45:05(UTC)
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Thank you all,

I'll report back what HL say about preferring to use the OCR as I think it does not help someone understand the costs involved as much as the RIY.

Can people suggest defensive ITs or funds that would be similar to RCP but cheaper. I wondered about WITAN it has much better growth over 5 yrs, RIY only 1.9, lower risk rating on trustnet and they both recovered from the 2008 crash in just over 2 years.

Of course when you look at RIY rather than OCR, ETFs come out hugely cheaper eg hsbc msci world (hmwo) RIY = 0.15 thats nearly 20 times less than RCPs

Martin
King Lodos
Posted: 13 January 2018 01:31:42(UTC)
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RCP is fairly unique.

Any other defensive fund is basically going to be some combination of stocks, bonds and cash .. Ruffer's worth a look, but in most cases the appropriate Vanguard Lifestrategy probably does better just because it's cheaper.

But if you take this view that stocks and bonds are so expensive, thanks to QE, they're almost guaranteed losers, then a fund like RCP that can generate returns from lots of other sources (like macro trading and long/short), and do it well, is adding something to a portfolio that won't necessarily show up looking at 5 year returns


Stephen B.
Posted: 13 January 2018 14:09:16(UTC)
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One thing that still isn't disclosed in annual reports is the impact of the bid/offer spread, i.e. the fact that when shares are purchased there's an immediate loss when they're marked down to the bid price. Does anyone know if the RIY includes that?
chubby bunny
Posted: 13 January 2018 17:00:32(UTC)
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Stephen B.;55342 wrote:
One thing that still isn't disclosed in annual reports is the impact of the bid/offer spread, i.e. the fact that when shares are purchased there's an immediate loss when they're marked down to the bid price. Does anyone know if the RIY includes that?


I'm not sure, but it may be included in 'transaction costs'. To give an idea of how much spread costs can be, Woodford estimates 0.08% of NAV for his Equity Income fund.
Alan Selwood
Posted: 13 January 2018 17:53:59(UTC)
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Try asking Ian Cowie if he knows the answer?
Tyrion Lannister
Posted: 13 January 2018 18:53:45(UTC)
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I came to the conclusion a while ago that the best defence is cash and, to a lesser extent, gold.

I hold roughly 10% of my portfolio in bonds but am thinking of selling them and holding the cash. It seems virtually impossible to buy any decent bonds right now that offer above zero return, at least with cash you can get around 1%.

RCP is possibly better than cash but at an 8% premium? I don't think so.
King Lodos
Posted: 14 January 2018 00:09:03(UTC)
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NS&I savings bonds at 2.17% have replaced a large chunk of my short-duration bonds.

GAM Star Credit Opportunities is still an enigma though.

Great year for stocks, and now a potential melt-up – and this bond fund's still ahead of global, UK and US equities over the year .. Can't vouch for how well it'll stand up as defence, but the manager seems extremely capable

https://i.imgur.com/C8fs2ew.jpg
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colin overton
Posted: 14 January 2018 11:55:16(UTC)
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I suspect some of these "standard methods" of calculating return and costs both over and under estimate these important factors for different investor positions.
I have over the last few years started using HL's app to manage/look at my accounts on mobile devices, including a phone. Although I wouldn't generally use costs as a deciding factor to choose an investment (excepting US Trackers and where everything else is equal between two opportunities - it usually isn't) they are important to at least be aware of. HL now give a misleading cost example on all investments, showing what you would pay to buy/hold/sell an isolated investment of £5000 over 5 years. The example costs are frightening high and take no account of if you own a second or indeed 20 other investments or pay less than the maximum charge in all categories. There also seems to be no warning on this part of the app that these costs may be completely misleading, although you can change the assumptions on account type - this seems to do very little. I have seen tables ranking HL as wildly expensive and believe these "phoney" costs may come from these misleading published costs and are another example of sloppy journalism.
Here is a particularly loopy example of a cost calc., I just got off the HL app. For F&C IT £5000 invested over 5 years with a 5% growth (not really sure how this affects the cost?) the total cost is £422.82 (!!!???). This is split as £146 HL and £276.81 Investment charges. The average annual percentage cost is given as 1.56%, but doesn't seem to tally with 0.45% (HL's max platform cost) plus the published on-going charge of 0.54%. And I thought ITs were supposed to be cheap investment vehicles? If these costs were true I'd sell all my holdings and buy gold which I'd hide under my bed! How discouraging must figures like this be to new investors who are unaware that these cost are or at least may be wrong?
PS on the same calc. holding Shell is much cheaper, only £173 or 0.63%p.a.! Note on these examples the "spread" is close to zero, but I'm not sure the spread is really captured as others have questioned.
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Stephen B.
Posted: 14 January 2018 12:17:05(UTC)
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Various points:

The growth rate will affect the cash cost because the charges will be a percentage of a bigger value.

For ITs the discount may be relevant - the charge is normally a percentage of the NAV, so may be higher as a percentage of the (smaller) share price.

The HL cost may include the dealing charge and stamp duty on the purchase, although that will be fairly small.

Shell (or any single share) will obviously look cheaper because there are no management costs - Shell certainly costs a lot to run but that isn't included!

I'm not sure why you say that if the costs were real you'd sell - generally speaking the costs *are* real (indeed higher for most funds) and the point of this sort of disclosure is to make you aware of them. However that's not in itself a reason not to invest, a fund may still be worth the cost.

Finally, in the fact sheet linked from the HL page I see:

Management fee rate**: 0.365% p.a. based on
Market Capitalisation
Total expenses: 0.53%
Ongoing charges**: 0.79%
** Ongoing charges calculated in accordance
with AIC recommendations.

So the questions there would be what are the AIC recommendations, why does the main HL page quote the middle figure, and what is their app using?
King Lodos
Posted: 14 January 2018 12:17:47(UTC)
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With Foreign & Colonial (like RCP), it's including the charges of the funds it holds.

So it's got Utilico in the top 10 (can be quite a hefty charge with the performance fee) .. It holds Harbourvest, Pantheon, etc.. Private Equity is always expensive.

What it doesn't show is how much the fee would go down if performance wasn't so strong, as performance fees are part of this .. So it's not entirely accurate extrapolating future cost impact from today's figures.


Having said all that, the best performing fund in the world (Renaissance Medallion) has a fee of 4% plus a 40% performance fee .. It's all down to whether what they're doing with the fees amounts to something worthwhile.

Wasn't there a study showing investment trusts with performance fees tended to outperform those without? I'm not entirely sure, but there is the argument that it compels managers to do their jobs properly, when closet indexing is an easy alternative


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Stephen B.
Posted: 14 January 2018 12:32:16(UTC)
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Personally I'm always skeptical that performance fees make any difference at all to how a fund gets managed, it may be more that a performance fee is an easier sell if the performance seems to be good. And if the fee is asymmetrical, i.e. not negative for underperformance, it's if anything an encouragement to take risks, with a benefit if they come off and no penalty if they don't. Private equity is different, there it's a standard part of how it works, and the managers generally are taking an active involvement in the running of the investee companies.

As for closet trackers - I'll offer to run two funds, once with the 50 biggest companies and one with the next 50, and take a performance fee if I outperform the FTSE ... hey, I'll do it with only the performance fee. (A variant on the old betting scam - I'll give you a tip, you only have to pay me if you win.)
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Tyrion Lannister
Posted: 14 January 2018 13:44:34(UTC)
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On the subject of costs,

Can anyone tell me whether the OEIC/UT performance graphs presented on the HL site take into account the platform charge?
Stephen B.
Posted: 14 January 2018 13:51:05(UTC)
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[quote=Tyrion Lannister;55374Can anyone tell me whether the OEIC/UT performance graphs presented on the HL site take into account the platform charge?[/quote]

No, there wouldn't be any clear way to do that, they're just the performance of the fund itself (so including the effect of all the internal charges).
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Tyrion Lannister on 14/01/2018(UTC)
chubby bunny
Posted: 14 January 2018 14:54:57(UTC)
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colin overton;55365 wrote:
Here is a particularly loopy example of a cost calc., I just got off the HL app. For F&C IT £5000 invested over 5 years with a 5% growth (not really sure how this affects the cost?) the total cost is £422.82 (!!!???). This is split as £146 HL and £276.81 Investment charges. The average annual percentage cost is given as 1.56%, but doesn't seem to tally with 0.45% (HL's max platform cost) plus the published on-going charge of 0.54%. And I thought ITs were supposed to be cheap investment vehicles? If these costs were true I'd sell all my holdings and buy gold which I'd hide under my bed! How discouraging must figures like this be to new investors who are unaware that these cost are or at least may be wrong?
PS on the same calc. holding Shell is much cheaper, only £173 or 0.63%p.a.! Note on these examples the "spread" is close to zero, but I'm not sure the spread is really captured as others have questioned.


They give you a full breakdown of the calculations on their desktop website. Here's the breakdown for FRCL. It is indeed quite expensive to hold small amounts in ITs on HL, and someone investing £5000 would be better off using cheap, flat fee brokers like iWeb, X-O and SVS.
Stephen B.
Posted: 14 January 2018 15:51:22(UTC)
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£45 a year max isn't all that much in absolute terms - very different to what you pay for oeics. On an infrequently traded IT-only portfolio HL probably run at a loss.
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