Management fees and expenses (again...)

[CryptoPlankton]

I had pretty much satisfied myself that this topic was done and dusted, but then I saw myself quoted on the WWH thread. As richfool correctly pointed out, further discussion wouldn't really be suitable there so I'm starting a new topic just to reply:

"Isn't it better to pay a nominal 2% for a net 10% return than 1% for a 5% return?"

Well yes, if the future net 10% return were guaranteed. However, the problem is you might just as easily pay an annual 2% management fee and end up getting a 5% return or worse.

Many people greatly underestimate the compounding effect of high management fees on the long-term value of their investments, as explained on this web page:

https://longviewassets.com/investment-m ... n-reverse/

I do understand this, but the point is a 2% drag on 10% compounded is preferable to a 1% drag on 5% compounded. Couldn't you just as easily pay an annual 1% management fee and end up getting a negative return? Obviously, we never know what the future holds for our investments, but surely we chose them because our research suggests that they will give us the best net return from their particular class.

IT fees aren't "real" in the sense that you have to pay them directly and I (possibly misguidedly, which is why I have put the question so often!) see them as an effectively notional thing that loses relevance as I look at the overall performance. Costs are everywhere in business and we, as broad equity investors, aren't generally concerned with the minutiae. For instance, on average, FTSE 100 companies pay Executive Directors 0.5% of Post-tax profits*. Some will pay more and some will pay less, but who cares which? The important thing to the average investor is that profit figure and how it translates to movement in the share price. Similarly, I am only interested in the prospects for growth or income (or both!) from an IT based on factors such as its profile, size, holdings, premium/discount to NAV, performance, yield etc. All these things are knowable without reference to the "costs" and I can honestly say that I don't believe I have ever come unstuck by ignoring them all these years.

Anyway, I felt I should reply to peka, but I'm even boring myself now, so that's enough from me on the subject - please don't make me post again!

P.S. Are quoted TER's even that accurate, testable or consistently calculated across the board and comparable?

*Hay Goup (pdf): https://www.haygroup.com/downloads/uk/E ... elease.pdf

[Itsallaguess]

IT fees aren't "real" in the sense that you have to pay them directly and I (possibly misguidedly, which is why I have put the question so often!) see them as an effectively notional thing that loses relevance as I look at the overall performance. Costs are everywhere in business and we, as broad equity investors, aren't generally concerned with the minutiae.

For instance, on average, FTSE 100 companies pay Executive Directors 0.5% of Post-tax profits*. Some will pay more and some will pay less, but who cares which?

I've found myself nodding quite a lot when you've brought this up in the past CP, so I wouldn't want you thinking that you're banging too much of a lone-drum here...

It is an interesting conundrum - why do we compare IT fees at a really quite clinical level, and not, say the Return on Capital Employed figures for a given list of companies.

Both involve a level of capital-drag that might compare favourably or unfavourably with a different investment proposition, but we see one as a 'real cost', and one as helping to describe a 'cost of business' (and similarly for other 'costs of business', of course...).

I also agree that taking too much notice of IT-fees can sometimes blind us from otherwise interesting and 'difficult-to-replicate' investment options, so I think that whilst they might be something to bear in mind, I certainly don't think they should be given the prominence they often are in helping to determine valid options for our investment capital.

With that said, I also marvel at some of the cheaper 'multi-ETF' methods that some here develop, to help keep costs to a minimum whilst achieving 99% of a similar single-hit Investment Trust, for instance, but we should remember that whilst this might well be a level of cost-trimming that's worthwhile for some sizes of portfolio's, this might not be the case for everyone.

Cheers,

Itsallaguess

[Dod101]

We are concerned, at least I am about management fees because they are a guaranteed expense come what may. As I read this last week somewhere, they are in fact compound interest in reverse. If we had to pay 2% for a guaranteed 10% return that would be one thing but in the IT world as you know there is no such thing as a guarantee and often the 10% will instead be 5% or a negative figure but the management fee rolls on. That is why I am concerned about them. Sometimes as you say I might want to invest anyway because I want the exposure to something I cannot get myself but I will certainly try to avoid a high management fee.

ROCE of course does not apply to ITs and it is simply a measure of how successful one company is against another in investing its capital. Nothing absolute about it because I dare say some industries are inherently better than others when using this measure.

Dod

[Itsallaguess]

ROCE of course does not apply to ITs and it is simply a measure of how successful one company is against another in investing its capital. Nothing absolute about it because I dare say some industries are inherently better than others when using this measure.

I appreciate that, but why do we hear very little discussion on comparable ROCE figures for companies in the same industry?

Or other 'cost-of-business' related figures?

Cheers,

Itsallaguess

[richfool]

I think it also worth remembering that the actual performance of an IT, is net of fees/charges, whatever those costs may be. So if a trust is sat at the top of the past performance tables, (or at the bottom), that is net of fees/charges.

[Dod101]

And of course if a trust is sitting at the top of a performance table and has about the lowest fees that is a rare animal indeed. I was thinking of Scottish Mortgage. I do not get hung up about fees because I am of course aware of Fred's point. There is though a lot more to Oeics than just fees.

And I think the ROCE point made by Itsallaguess is fair but apart from the tobaccos it is very difficult to get two companies even in the same industry doing the same thing but this is off topic I guess.

Dod

[OhNoNotimAgain]

The argument is much easier to understand if you examine the cash cost charged to a fund rather than expressed as a percentage.
Future returns are unknown and unknowable so saying 2% cost for 10% return v 1% costs for 5% return is not a valid argument.

All you can ever know about a fund is its cost structure, i.e. how much is fixed and how much is variable, and its investment process; is it rules-based or not. If not no amount of analysis will help (ref Woodford, Bolton etc.)
A key element of variable costs is portfolio turnover but no one ever talks about that.
A lot of costs are fixed or have a minimum level, such as audit, FCA fees and custodian fees.

[StOmer]

Beats me why some are so hung up on costs, if the charges concern then simply invest money elsewhere.

[Muddywaters]

For me at least, it’s not a matter of simply ignoring fees and investing elsewhere.

Each time I invest in an IT I weigh up whether I think I would be better off with a tracker/etf. There’s clearly a judgement call on whether one will outperform the other.

If the fees on an active IT are what i consider to be on the high side then that surely has to be a factor in selection. Bar one OEIC I only invest in IT’s due to the leverage. If I don’t believe that the higher fees on an active fund can be offset by a decent manager and the leverage I’ll pick an etf.

It’s only with hindsight that we tell whether the right call was made, but lower fees gives an active fund a better chance of outperforming