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Help on fund charges

Index tracking funds and ETFs
TheMotorcycleBoy
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Help on fund charges

#169619

Postby TheMotorcycleBoy » September 27th, 2018, 8:08 pm

Hi,

I'm looking to purchase some of the following fund in our iWeb stocks and shares ISA

Schroder High Yield Opportunities Z Acc GB00B83RDY83

On the specification of the fund, published by iWeb it lists the following information:

Initial charge: 	      0.00%
Ongoing Charge Figure (OCF): 0.72%
Performance Fee: N/A
Transaction Fee: 0.5% (based on industry average)
*Dealing commission: £5.00


I understand that the £5 dealing commission is just the commission that iWeb take any time we buy or sell any units/assets. I think that OCF is an annual charge that is taken from the fund's values day-by-day (i.e. charge * 1/365). But what exactly does the 0.5% "Transaction Fee" mean? I did wonder if it is something specific to iWeb, since it does not seem to be mentioned in the literature on the Schroders website.

https://www.schroders.com/getfunddocume ... .9.3030047

many thanks,
Matt

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Re: Help on fund charges

#169626

Postby hiriskpaul » September 27th, 2018, 8:34 pm

I think it is just iWeb's estimate of the transaction charges that will be incurred by the fund. A fairly useless figure I think iWeb feel obliged to quote. To get a better idea you can look at the funds KID, or better still the annual accounts.

This does not sound like a passive fund by the way. The charge of 0.72% and the word "Opportunities" is a bit of a giveaway ;)

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Re: Help on fund charges

#169627

Postby TedSwippet » September 27th, 2018, 8:35 pm

Melanie wrote:But what exactly does the 0.5% "Transaction Fee" mean? I did wonder if it is something specific to iWeb, since it does not seem to be mentioned in the literature on the Schroders website.

This 0.5% is a completely meaningless 'average' number that iWeb produce (perhaps under MIFiD, PRIIPS, or some similar 'full costs disclosure' regulation) when they have no actual data to fill in here. They don't charge any 'transaction fee' for fund trades beyond the £5 advertised commission, and you can therefore ignore this specious 0.5% number.

ETA: In essence, what hiriskpaul already said :-)

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Re: Help on fund charges

#169647

Postby Alaric » September 27th, 2018, 9:44 pm

TedSwippet wrote:This 0.5% is a completely meaningless 'average' number that iWeb produce (perhaps under MIFiD, PRIIPS, or some similar 'full costs disclosure' regulation) when they have no actual data to fill in here.


It's likely to be a guess, but is it supposed to give a benchmark for the costs the fund will incur in buying and selling investments? These are not required to be specifically reported in OEICs but will act as a drag on performance with the more active the fund, the higher the costs.

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Re: Help on fund charges

#169699

Postby TheMotorcycleBoy » September 28th, 2018, 6:45 am

TedSwippet wrote:This 0.5% is a completely meaningless 'average' number that iWeb produce (perhaps under MIFiD, PRIIPS, or some similar 'full costs disclosure' regulation) when they have no actual data to fill in here. They don't charge any 'transaction fee' for fund trades beyond the £5 advertised commission, and you can therefore ignore this specious 0.5% number.


Yes, Mel phoned iWeb later on in the evening - they stay open till 9.30. I think we agree with you.

Alaric wrote:It's likely to be a guess, but is it supposed to give a benchmark for the costs the fund will incur in buying and selling investments? These are not required to be specifically reported in OEICs but will act as a drag on performance with the more active the fund, the higher the costs.

I think you are spot on there Alaric. Me and Mel chatted about this and we downloaded Schroeder's paperwork and could not find any ref. to 0.5% transaction charge.

So we figured it thusly: Schroeder deal with big guys like iWeb (the schroeder document mentioned a £1M minimum investment amount!). They sell this investment to people like iWeb, with it's OCF, who I guess split it up into unit chunks and trade them to the small fry taking "only" £5 commission themselves.

We figure that, as you say, within the fund, bonds mature and generate cash flows all the time, and these accumulate. Hence the manager then has to buy more instruments, and if this is costly at the time, he may, for certain funds apply an additional charge. However we believe that for the fund of interest, this is not done, and thus any transaction charges are wrapped up in the blanket OCF.

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Re: Help on fund charges

#169700

Postby TheMotorcycleBoy » September 28th, 2018, 7:02 am

hiriskpaul wrote:I think it is just iWeb's estimate of the transaction charges that will be incurred by the fund. A fairly useless figure I think iWeb feel obliged to quote. To get a better idea you can look at the funds KID, or better still the annual accounts.

Thanks Paul.

hiriskpaul wrote:This does not sound like a passive fund by the way. The charge of 0.72% and the word "Opportunities" is a bit of a giveaway ;)

Ha ha! :lol: I do see what you mean regarding the "active/passive" point. I just didn't know whether to post the question here or here.

But anyway, do you think 0.72% is too high? I guess the manager needs to apply a thought process frequently in terms what new investments to purchase.

I guess the way I'm trying the view this investment, is by thinking that with this fund, we have about

6.28 (yield) - 0.72 (fee) = 5.56

compared to a preference share purchase (e.g. aviva, lloyds, natwest etc.) which are currently yielding about 5.5 - 6.0 I think, but would offer us less diversity and a slight additional dividend reinvestment cost.

What are your thoughts?

thanks Matt

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Re: Help on fund charges

#169704

Postby GeoffF100 » September 28th, 2018, 7:33 am

Melanie wrote:But anyway, do you think 0.72% is too high? I guess the manager needs to apply a thought process frequently in terms what new investments to purchase

0.72% is huge. You pay that every year you hold the investment. After 50 years, that reduces your investment by a factor of (1 - 0.72 / 100)^50 = 0.696768. After 50 years, you will have lost more than 30% of your investment to that fee.

On average, the returns of actively managed funds (by the broadest definition) generate exactly the same return as the index before costs. There is no way of predicting in advance which funds will do better than the index and which will do worse. The best choice is an index tracker with the lowest possible costs.

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Re: Help on fund charges

#169711

Postby TheMotorcycleBoy » September 28th, 2018, 8:39 am

GeoffF100 wrote:
Melanie wrote:But anyway, do you think 0.72% is too high? I guess the manager needs to apply a thought process frequently in terms what new investments to purchase

0.72% is huge. You pay that every year you hold the investment. After 50 years, that reduces your investment by a factor of (1 - 0.72 / 100)^50 = 0.696768. After 50 years, you will have lost more than 30% of your investment to that fee.

On average, the returns of actively managed funds (by the broadest definition) generate exactly the same return as the index before costs. There is no way of predicting in advance which funds will do better than the index and which will do worse. The best choice is an index tracker with the lowest possible costs.

Hi Geoff,

Thanks for your reply, I've certainly not my heart set on this investment anyway, and I really do appreciate the advice. We do already have a low cost (Fidelity) world equity index tracker, but the reason why this fund has come up emanates from an earlier post of mine, that is, whilst our ISA iWeb is quite cheap, they offer a limited selection of high yield standalone retail bonds and as we do wish to raise the level of "fixed-income" investments in our portfolio, acquiring that via. a "Bond fund" looked like the best way.

I have also considered pref. shares, but then considered that a fund of (high yielding!) bonds to be a more diversified option.

Many thanks for your comment, but do you have any ideas of a good route (see my earlier post) ? i.e. a cheap fund of high yield bonds?

TBH I don't know much about funds, e.g. differences between OEICs and ETFs. Do you think there are ETF high yield bond funds? Can you mention any that I can search for on iWeb?

Apologies for all the additional questions!
many thanks, Matt

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Re: Help on fund charges

#169760

Postby Alaric » September 28th, 2018, 10:31 am

Melanie wrote: Do you think there are ETF high yield bond funds?


There's the ishares Corporate Bond fund SLXX in GBP. Otherwise there are many more Corporate Bond ETFs with a global or dollar focus. SLXX has a relatively modest distribution yield, presumably reflecting the quality of the bonds included in the index it tracks.

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Re: Help on fund charges

#169765

Postby Alaric » September 28th, 2018, 10:42 am

Melanie wrote:But anyway, do you think 0.72% is too high? I guess the manager needs to apply a thought process frequently in terms what new investments to purchase.


Not just new investments, whether to continue to hold existing ones. It's a fund out on the frontiers of the fixed interest universe where credit risk, in other words the ability of the issuers of the bonds held by the fund to maintain payments, is an ongoing issue. It's also a search for potential bargains, where the price of the bond is lower than the fund manager's assessment of the risk would expect it to be.

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Re: Help on fund charges

#169767

Postby TheMotorcycleBoy » September 28th, 2018, 10:46 am

Alaric wrote:
Melanie wrote: Do you think there are ETF high yield bond funds?


There's the ishares Corporate Bond fund SLXX in GBP. Otherwise there are many more Corporate Bond ETFs with a global or dollar focus. SLXX has a relatively modest distribution yield, presumably reflecting the quality of the bonds included in the index it tracks.

Thanks Alaric,

So I'm back to square one really, it seems. To get high yield bonds in a fund I get higher charges, if I want low charges, it's likely the yield will disappoint.

Unless someone does know of a high yield (> 6%) bond fund with low charges?

BTW, slight question but regarding a bond fund what's difference between ETFs, OEICs and Unit trusts?

M

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Re: Help on fund charges

#169770

Postby TheMotorcycleBoy » September 28th, 2018, 10:48 am

GeoffF100 wrote:that reduces your investment by a factor of (1 - 0.72 / 100)^50 = 0.696768.

Don't you mean?

(1 - (0.72/6.28) / 100)^50 = sorry no calculator

since 6.28 is the fund yield?

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Re: Help on fund charges

#169780

Postby SalvorHardin » September 28th, 2018, 11:08 am

Melanie wrote:
GeoffF100 wrote:that reduces your investment by a factor of (1 - 0.72 / 100)^50 = 0.696768.

Don't you mean?

(1 - (0.72/6.28) / 100)^50 = sorry no calculator

since 6.28 is the fund yield?

GeoffF100 is correct. It's the standard formula for compound growth which is; Value of £ C in t years = C x (1 + growth rate) ^ t

Since we're just looking at the effect of fees the growth rate is negative; i.e. -0.72% or -0.72/100 = -0.0072

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Re: Help on fund charges

#169789

Postby TheMotorcycleBoy » September 28th, 2018, 11:20 am

SalvorHardin wrote:
Melanie wrote:
GeoffF100 wrote:that reduces your investment by a factor of (1 - 0.72 / 100)^50 = 0.696768.

Don't you mean?

(1 - (0.72/6.28) / 100)^50 = sorry no calculator

since 6.28 is the fund yield?

GeoffF100 is correct. It's the standard formula for compound growth which is; Value of £ C in t years = C x (1 + growth rate) ^ t

Since we're just looking at the effect of fees the growth rate is negative; i.e. -0.72% or -0.72/100 = -0.0072

Ok, I need to think about this some more.

So in terms of my return, say over 20 years, what's better? A low yield fund say 4.0% annual return with 0.1% OCF compared to a high yield one say 6.28% annual return with 0.72% OCF?

I'm not ignoring the fact that fees add up, the lower the better etc. I want to assess quantitively the best option (high yield+ocf VS low yield+ocf) for us.

I'm also trying to compare and contrast with a preference share holding (e.g. AV.B), where for example we get a yield of 5.8% but iWeb charge us 0.5% for each divi they reinvest.

M

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Re: Help on fund charges

#169790

Postby Alaric » September 28th, 2018, 11:25 am

Melanie wrote:BTW, slight question but regarding a bond fund what's difference between ETFs, OEICs and Unit trusts?


That's a general question, nothing to do with bond funds.

OEICs and Unit Trusts are different legal formulations of the same thing, with OEICs being the more recent structure. There's only one price a day, so if you want to buy or sell, your order goes into a queue and you get the same price as everyone else. Unlike a quoted Company, the number of shares (units) in issue changes at every dealing point. An advantage of OEICs to distributors if not investors was that multiple classes of units are allowed so levels of charges varying by distribution channel became possible.

ETFs are traded continuously, like shares or bonds. There's a back office process to reflect these purchases and sales in holdings of actual assets by the fund. Markets for virtual assets, promises to buy and sell at some future date fit in there somewhere.

Does anyone have a pointer to a technical specification of how ETFs actually work? For OEICs, the FCA will have written hundreds of pages describing how they are meant to work.

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Re: Help on fund charges

#169797

Postby Alaric » September 28th, 2018, 11:41 am

Melanie wrote:So in terms of my return, say over 20 years, what's better? A low yield fund say 4.0% annual return with 0.1% OCF compared to a high yield one say 6.28% annual return with 0.72% OCF?


The fund you mention with the 6.28% distribution was taking its 0.72% from capital. In the absence of any other capital price movements you earn the difference, 5.56%. A fund with a 4% distribution and 0.1% charge to capital gives you 3.9%.

As always with percentages, one should be clear what it is a percentage of. When you mention the iweb reinvestment charge, is that 0.5% of the amount reinvested? If so then your preference share return is 0.995 times what the running yield is quoted as.

What you are seeing is an illustration of the trade off between risk and return.

The 4% fund has a lower return but less credit risk. At the cost of higher credit risk and higher charges, you may get a higher return at the "Opportunities" fund. But it all might go wrong and the 4% fund could ultimately have been the better investment. Highest risk of all and the best return comes from a Preference Share. Your risk there is being exposed to the single company who issued the share.

If you buy shares, you are exposed to single company risk. But the potential reward is so much higher given that share prices can and do double over relatively short periods of time. They can halve as well of course.

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Re: Help on fund charges

#169806

Postby GeoffF100 » September 28th, 2018, 11:55 am

Melanie wrote:So in terms of my return, say over 20 years, what's better? A low yield fund say 4.0% annual return with 0.1% OCF compared to a high yield one say 6.28% annual return with 0.72% OCF?

The return from a fund is not directly related to its running yield. It is not simple to work out the expected return of a bond fund even in the absence of defaults. If an individual bond has a higher redemption yield in the absence of default, that implies that the market believes that it has a higher risk of default, and that the extra return in the absence of default is a necessary compensation for that risk.

If you are investing in a tax free fund, a good general purpose bond fund is the Vanguard Global Bond Fund (hedged to Sterling). That spreads your risk over a huge number of international bonds with low to medium risk. It is not at all simple under the bonnet though. It will give you a lower return than a bank or building society bond guaranteed by the FSCS, but does not carry the risk that the British government will default, except to the extent that it is invested in gilts. (Actually, it is more complicated than that, but what I have said is basically true.) It also will not protect you against inflation. You need index linked gilts for that (assuming that the government does pay up).

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Re: Help on fund charges

#169810

Postby mc2fool » September 28th, 2018, 12:16 pm

GeoffF100 wrote:0.72% is huge. You pay that every year you hold the investment. After 50 years, that reduces your investment by a factor of (1 - 0.72 / 100)^50 = 0.696768.

Only if you have 0% growth in your investment over the 50 years. As the %age growth increases the reduction factor decreases. To properly calculate it one should figure both the overall growth at any particular per annum %age growth without any deduction for the desired period and also with the deduction and then compare the two.

Not disagreeing with your overall point, just saying the maths isn't quite that simple. :D

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Re: Help on fund charges

#169828

Postby GeoffF100 » September 28th, 2018, 1:13 pm

mc2fool wrote:
GeoffF100 wrote:0.72% is huge. You pay that every year you hold the investment. After 50 years, that reduces your investment by a factor of (1 - 0.72 / 100)^50 = 0.696768.

Only if you have 0% growth in your investment over the 50 years. As the %age growth increases the reduction factor decreases. To properly calculate it one should figure both the overall growth at any particular per annum %age growth without any deduction for the desired period and also with the deduction and then compare the two.

Not disagreeing with your overall point, just saying the maths isn't quite that simple. :D

I said charges reduce the return by a factor of... A "factor" is a multiplier. You multiply the growth that you would have got if there were no charges by this factor. As I said, the money you get with charges is more than 30% less than you would have got without charges, irrespective of what the growth before charges might be. The factor remains the same. (It is also worth mentioning that the quoted charges are not necessarily an accurate representation of the actual costs. Vanguard are more up front about their costs than most other fund managers.)

We do not know what the growth before charges will be because we do not know what the defaults will be, and we do not know the terms of reinvestment, for example. The calculation is also not simple as I have said. We do know that the higher the expected return, the higher the risk. A possible exception is bank and building society bonds guaranteed by the FSCS, which are not available to wholesale investors.

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Re: Help on fund charges

#169834

Postby mc2fool » September 28th, 2018, 1:26 pm

GeoffF100 wrote:I said charges reduce the return by a factor of... A "factor" is a multiplier. You multiply the growth that you would have got if there were no charges by this factor. As I said, the money you get with charges is more than 30% less than you would have got without charges, irrespective of what the growth before charges might be. The factor remains the same.

Not so. Here's a worked example:

Overall growth at 5%pa over 50 years with no charges: 1.05^50 = 11.467399785753676034851413551211
Overall growth at 5%pa over 50 years with 0.72%pa charges: 1.0428^50 = 8.1292620758362740069967608049655
Factor = 0.70890195054815485320669794735049

Overall growth at 10%pa over 50 years with no charges: 1.1^50 = 117.39085287969531650666649599036
Overall growth at 10%pa over 50 years with 0.72%pa charges: 1.0928^50 = 84.534563963719246164694067941133
Factor = 0.72011201801516932986043374681189

(Sorry for the silly length numbers, just cut'n'pasting directly from the calculator :D)


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