IT charges

[chevin]

I'm going to sound incredibly naive here, but so be it!

A lot of talk when it comes to ITs is about charges, X charges 0.5%, Y charges 1% etc, and this is part of the equation when it comes to investing in an IT. So, to put it simply, why? When I buy an IT, I buy it at a price, and when I sell it, I sell it at a price. In between times, I receive a divi. Now, I know that before the divis are circulated, the IT will deduct charges, and therefore my divi will be less than it would otherwise be, but that, surely, is built in to the system - it's already been taken account of when comparing returns, as I've been working on the yield that the IT is paying, not the yield it might have paid if no charges were being made. I'm not saying charges are irrelevant, but to me it seems that charges are almost being considered twice over.

Can someone put me out of my naivety? TIA!

[mc2fool]

In between times, I receive a divi. Now, I know that before the divis are circulated, the IT will deduct charges, and therefore my divi will be less than it would otherwise be

While some ITs take charges out of income, some take it out of capital, and some take it a bit out of both in some proportion or another. Check their annual report to see which.

[StOmer]

Charges will impact on performance and are just one factor that may be considered when looking for an investment. It appears to me that some investors may put too much emphasis on those charges and allow it to unduly influence their portfolio.

[nmdhqbc]

That's exactly how I think about charges when looking at past performance. Like you say the charges are built into the price and you can see the dividend levels. It's no guarantee of future performance though and the higher charges are a drag on that. The likelihood of the 1% charger beating the 0.5% charger is reduced because they actually have to perform more that 0.5% better to give a better result. If past performance was the ONLY predictor of future performance I wouldn't even look at the charges. Sadly it isn't that simple.

[vrdiver]

Let's take an extreme example:

I am offering an IT. Let's call it SINIT, which specialises in big, very big, alcohol and tobacco. SINIT is a conviction-style IT, and is currently invested in BATS and DGE. SINIT charges 1%.

Obviously, any private investor who wanted to replicate SINIT themselves could easily do so and save the 1% management fee.

However, the management of SINIT have borrowed money at a cost less than the blended yield on BATS and DGE. The 1% fee is expected to be less than the combined dividends and capital appreciation provided by the debt. If all goes well, SINIT will now outperform the PI. (If there's a downturn for BATS or DGE, SINIT will fall further, so there is added risk vs the PI alternative.)

At the other extreme, an IT could be invested in 100+ international shares, making adjustments (buying and selling) in markets that our investor has little detailed knowledge of. In the latter case, the 1% charge might be considered a fair exchange for the access to this market and the expertise provided.

In summary - the IT fee needs to be considered, but in the context of what the IT is offering for the cost. I don't hold CTY as it would duplicate a large segment of my HYP portfolio, but I do hold HFEL, as neither would it be a duplication nor do I have appropriate knowledge in its investment geography.

Horses for courses and all that...

[CryptoPlankton]

I'm going to sound incredibly naive here, but so be it!

A lot of talk when it comes to ITs is about charges, X charges 0.5%, Y charges 1% etc, and this is part of the equation when it comes to investing in an IT. So, to put it simply, why? When I buy an IT, I buy it at a price, and when I sell it, I sell it at a price. In between times, I receive a divi. Now, I know that before the divis are circulated, the IT will deduct charges, and therefore my divi will be less than it would otherwise be, but that, surely, is built in to the system - it's already been taken account of when comparing returns, as I've been working on the yield that the IT is paying, not the yield it might have paid if no charges were being made. I'm not saying charges are irrelevant, but to me it seems that charges are almost being considered twice over.

Can someone put me out of my naivety? TIA!

You're not alone, chevin! It's a subject that has been discussed before and, no doubt, will be again. I've satisfied myself (both from my own experience and the arguments I've read) that charges need not be much of a consideration when selecting an IT. Not everyone agrees and here are a couple of links to previous discussions:

viewtopic.php?f=54&t=11951

and the thread that lead to it (fees come into it after eight posts - I took it off topic three posts later, sorry!):

viewtopic.php?f=54&t=9349

[chevin]

Thank you to you all for such swift and to the point responses.

mc2fool: Good point.

nmdhqbc: I hadn't thought about the future performance issue.

Vrdiver: That confirms my thinking -it's one of the main reasons I've gone over to ITs, as they have enabled me to give my portfolio a much more international spread. I do hold CTY as it gives me a chance to hold those shares all in one pot, not indivdually in otherwise relatively fairly small amounts, as I've reduced the UK element of my portfolio down (substantially) - and it's simplified things a bit (at least for me!); I've disposed of the individual shares I held.

Cryptoplankton: I hadn't spotted those threads - thank you, and apologies to all if I've just duplicated what has gone previously.

[CryptoPlankton]

and the thread that lead to it...

(Off topic)

I can think of three explanations:

1) A typo

2) The mind was caught between using present and past tenses and lazily failed to decide

3) The author is simply semi-illiterate (or heading that way, given his family history)

You decide...

[Avantegarde]

I feel that charges are very important to assess. I launched my portfolio of, originally, thirteen ITs five years ago. Looking back on their "performance", some had done very well indeed. Others from the original selection had been weeded out gradually for various reasons (closure, abject performance, or a strategic decision by me to get out of a certain sector). Yet even among the seemingly half-decent performers, several had given a return no better than that of a comparable index (eg FTSE World ex-UK). Yet typically their charges would be ten times that of a tracker eg 1% compared to 0.1%. Why, precisely, should I pay £100 pa instead of just £10 pa on a £10,000 holding? Some of my ITs had in fact performed much worse than the relevant comparable index but I only really twigged after looking back five years. A glaring example was the North American Income Trust compared to an S&P 500 tracker. In essence, I felt I had been taken for a ride, and I do not like that feeling. So my portfolio of, now, 16 investment funds has morphed into one with 5 trackers and 11 ITs. I believe this is called a "core and satellite strategy". I wish I had adopted it five years ago, but of course you don't know how things will develop. But it is a lesson learned I think.
PS: The trusts which I have kept, and which I reckon have justified their existence have been: Scottish Mortgage, Bankers, F&C, TR Property, Henderson Smaller Cos and Standard Like UK Smaller Cos. I still hold Henderson International but its combination of high-ish fees and sub-par returns means I may ditch it in due course. The same goes for Murray International. I have owned it for just two years and that has rewarded me. But in the past year it has been on a big downward slide, unlike all other global ITs, so its days may be numbered in my portfolio too.

[XFool]

Some of my ITs had in fact performed much worse than the relevant comparable index but I only really twigged after looking back five years. A glaring example was the North American Income Trust compared to an S&P 500 tracker.

Thing there is, NAIT used to be an "S&P 500 tracker". Following recent fashions it changed a few years back into an income trust (and didn't its charges increase?). This may not now look like such a good idea. But the conclusion you reach might depend both on exactly which five years you are talking about and whether you are comparing its quoted price/nav to the index tracker price or on a total return basis.

Must confess I haven't got such data to hand.

[chevin]

I feel that charges are very important to assess.......

I understand that charges make a difference to performance. My point/question though was that their influence is built in to the performance already, so is there any point in considering them separately? Thus, I don't hold MYI because its performance has not been good enough for me, whether that's down to charges or not. I didn't need to consider the charges to make that decision. What I now take on board is that whilst charges are built into the historical performance, they are a warning that the IT will find it harder to perform as well as a lower charging alternative in the future.

[vrdiver]

I understand that charges make a difference to performance. My point/question though was that their influence is built in to the performance already, so is there any point in considering them separately?
<snip>
What I now take on board is that whilst charges are built into the historical performance, they are a warning that the IT will find it harder to perform as well as a lower charging alternative in the future.

A short article that makes much the same point, from Shares Magazine (AJBell Youinvest broker):
https://www.youinvest.co.uk/sharesmagaz ... ent-trusts

VRD

[xeny]

In efficient marker theory (EMT), returns are at least related to risk - the more risk you take, the more return you hope to get. (yes, I know that's an oversimplification).

If you consider two ITs with identical post fee returns, but with one having higher fees than the other, then you'd know that the pre fee returns are higher for the one with higher fees.

EMT then suggests that IT is taking higher risk to get those higher returns, so you'd tend to prefer the lower fee IT, even though both of them had identical returns, as you'd hope to get lower risk for your return.

[colin]

it's already been taken account of when comparing returns, as I've been working on the yield that the IT is paying, not the yield it might have paid if no charges were being made. I'm not saying charges are irrelevant, but to me it seems that charges are almost being considered twice over.

Can someone put me out of my naivety? TIA!
Top

No sorry but you have not been comparing returns only the yield, not the same thing. Some trusts pay a lower yield which has increased at a faster rate.
Some trusts pay a high yield which has not increased in years.

[Hariseldon58]

I think when you are deciding between IT’s and ETF’s and charges is a factor along with performance it’s important not to over emphasise recent performance.

Over the last 10 years it paid handsomely just to hold an S&P500 tracker, throw in falling sterling and it’s been a winner, as has a world tracker where the S&P500 would have been a major constituent.

The 10 years prior to 2009 were very different. Personally having gone from largely IT’s to almost exclusively ETF’s I am now returning to IT’s , although still a minority of the portfolio (increased from £50k to £600k since April) and I see further additions in the next few months as there are good discounts, more competitive charges, gearing is less likely to be on historically high rates and there is distinctive management on offer.

I suspect we will have interesting times ahead and following the crowd is not always the most rewarding path..

[colin]

If you consider two ITs with identical post fee returns, but with one having higher fees than the other, then you'd know that the pre fee returns are higher for the one with higher fees.

EMT then suggests that IT is taking higher risk to get those higher returns, so you'd tend to prefer the lower fee IT, even though both of them had identical returns, as you'd hope to get lower risk for your return.

Smart thinking Xeny, have a quarter of a commendation as my old maths teacher would say.

[DavidM13]

it's already been taken account of when comparing returns, as I've been working on the yield that the IT is paying, not the yield it might have paid if no charges were being made. I'm not saying charges are irrelevant, but to me it seems that charges are almost being considered twice over.

Can someone put me out of my naivety? TIA!
Top

No sorry but you have not been comparing returns only the yield, not the same thing. Some trusts pay a lower yield which has increased at a faster rate.
Some trusts pay a high yield which has not increased in years.

I feel like you are talking about other things. The original poster simply said that if he looks at a NAV return or Market Price return the values he sees are values that have accounted for historic charges. ie. The NAV return WOULD have been higher if the charges were lower and the market price return would LIKELY have been higher had charges been lower but in any case they are history now and baked in to the figures already. similarly for yield, the yield is what the yield is thats a fact, it may be higher if costs are lower or they are allocated differently but that is the current yield an investor is getting.