Investment funds

[crankedup]

Following a debate on my other thread, stopped owing to it being a squabble, let's have another debate about the value for money for investors in unit trusts, pension funds and other managed portfolio's.

I have long contended the value for money for the investor, with particular focus upon small investors, regarding costs a and performance reward from investment companies. Also the Governments intervention regarding the requirement for workers to be enrolled into a pension scheme via their employment.
The new pensions requirement is particularly interesting in that most employees will have a choice from just three or four companies offering to invest your money. Given that professionals in the field acknowledge the difficulties of the Global Economics currently it is unlikely that double digit returns will be likely. And yet most of these companies will still be making the same charges as back in the easy period of the 1980's /90's.
For small investors cash deposits are fairly worthless, many actually losing the customer money once inflation is taken into consideration and of course tax.

Jeff Prestridge of the Mail on Sunday wrote an interesting article in the 22/5/16 edition.
Talking of managed funds he said the rewards for looking after our wealth are huge, it's a dog eat dog world. Few fund managers survive for long if they can't deliver the alpha. Successful ones don't remain successful for long becoming victims of their own prowess. Investment mediocrity follows compounded by the power of online fund supermarkets with their Best Buy and wealth lists directing investors into a sleet band of funds.

This has led to pressure on the investment fund industry to justify its current ways and charges is intensifying. M& G is the first in confirming that it will be cutting costs for investors who have bought it's funds directly through them, rather than a fund supermarket. These investors will need to sign up to M& G new online service and those investors will need to hold investments worth over 5k.

Hopefully it will spark a price war with online fund dealing services to cut their bloated fees. The winners will be investors, about time too. Jeff Prestridge.

So far as pension funds are concerned they are far to complex, even the Chief Economist Andy Haldane, of the Bank of England admitted that he cannot make the remotest sense of pensions. If he can't fathom them out what hope have ordinary working people. Government past and present along with the pensions industry are both guilty as sin, having some financial education within our schools. Jeff Prestridge.

[sidicks]

crankedup said:

Following a debate on my other thread, stopped owing to it being a squabble, let's have another debate about the value for money for investors in unit trusts, pension funds and other managed portfolio's.

Good idea.

Firstly, let's be clear that a pension fund is just a wrapper, where an investor holds investments in a unit trust or other similar investments, but with some tax benefits.

Due to increasing regulatory requirements there is of course an additional cost for the pension wrapper that will necessarily be incurred by the investor.

crankedup said:

I have long contended the value for money for the investor, with particular focus upon small investors, regarding costs a and performance reward from investment companies. Also the Governments intervention regarding the requirement for workers to be enrolled into a pension scheme via their employment.
The new pensions requirement is particularly interesting in that most employees will have a choice from just three or four companies offering to invest your money.

Ironically, it is the large investor that subsidises the smaller investor (as the only charges permitted are based on fund value) - do you think that there should be an even bigger subsidy from large investors to small investors?

crankedup said:

Given that professionals in the field acknowledge the difficulties of the Global Economics currently it is unlikely that double digit returns will be likely. And yet most of these companies will still be making the same charges as back in the easy period of the 1980's /90's.

However, the amount of work / cost of fund management has increased rather than decreased (partly due to the increased regulatory burden that you normally support), so fees need to reflect the costs, not the potential returns (which are to some extent outside the control of the fund manager).

crankedup said:

For small investors cash deposits are fairly worthless, many actually losing the customer money once inflation is taken into consideration and of course tax.

Pensions are (almost) tax free, so this is less of an issue here, but clearly at current rates, cash strategies offer a negative real return.

crankedup said:

Jeff Prestridge of the Mail on Sunday wrote an interesting article in the 22/5/16 edition.
Talking of managed funds he said the rewards for looking after our wealth are huge, it's a dog eat dog world. Few fund managers survive for long if they can't deliver the alpha. Successful ones don't remain successful for long becoming victims of their own prowess. Investment mediocrity follows compounded by the power of online fund supermarkets with their Best Buy and wealth lists directing investors into a sleet band of funds.

This has led to pressure on the investment fund industry to justify its current ways and charges is intensifying. M& G is the first in confirming that it will be cutting costs for investors who have bought it's funds directly through them, rather than a fund supermarket. These investors will need to sign up to M& G new online service and those investors will need to hold investments worth over 5k.

Hopefully it will spark a price war with online fund dealing services to cut their bloated fees. The winners will be investors, about time too.

Ok, so I think it is fair to ask:
1) to what extent should large investors subsidise small investors?
2) to what extent should long-term investors subsidise short-term investors
3) to what extent should the fund charging structure reflect the actual costs incurred, rather than something 'simple' that the customer can easily understand?

crankedup said:

So far as pension funds are concerned they are far to complex, even the Chief Economist Andy Haldane, of the Bank of England admitted that he cannot make the remotest sense of pensions. If he can't fathom them out what hope have ordinary working people. Government past and present along with the pensions industry are both guilty as sin, having some financial education within our schools. Jeff Prestridge.

We need to be careful to differentiate between the wrapper and the underlying investment proposition - the complexity of the former is driven by government regulation.

[Murph7355]

1) Stop reading The Mail (I had to look up who Jeff Prestridge is. I thought it was some form of Tourette's you'd developed)
2) The quality of the people at the BoE hasn't been looking too great of late
3) Investments are like any other product you can buy. Research them the same way and take your own risk/reward balance
4) Stop reading The Mail

[crankedup]

Murph7355 said:

1) Stop reading The Mail (I had to look up who Jeff Prestridge is. I thought it was some form of Tourette's you'd developed)
2) The quality of the people at the BoE hasn't been looking too great of late
3) Investments are like any other product you can buy. Research them the same way and take your own risk/reward balance
4) Stop reading The Mail

It's not the only paper I read, Guardian and occasionally Morning Star.
I
I accept the statement from Andy Haldane to be of the highest integrity, honesty and value.
So far as personal investments go, I have taken to reading the Investors Chronicle again, after some years away from it.

Edited by crankedup on Monday 23 May 17:56

[crankedup]

sidicks said:

crankedup said:

Following a debate on my other thread, stopped owing to it being a squabble, let's have another debate about the value for money for investors in unit trusts, pension funds and other managed portfolio's.

Good idea.

Firstly, let's be clear that a pension fund is just a wrapper, where an investor holds investments in a unit trust or other similar investments, but with some tax benefits.

Due to increasing regulatory requirements there is of course an additional cost for the pension wrapper that will necessarily be incurred by the investor.

crankedup said:

I have long contended the value for money for the investor, with particular focus upon small investors, regarding costs a and performance reward from investment companies. Also the Governments intervention regarding the requirement for workers to be enrolled into a pension scheme via their employment.
The new pensions requirement is particularly interesting in that most employees will have a choice from just three or four companies offering to invest your money.

Ironically, it is the large investor that subsidises the smaller investor (as the only charges permitted are based on fund value) - do you think that there should be an even bigger subsidy from large investors to small investors?

crankedup said:

Given that professionals in the field acknowledge the difficulties of the Global Economics currently it is unlikely that double digit returns will be likely. And yet most of these companies will still be making the same charges as back in the easy period of the 1980's /90's.

However, the amount of work / cost of fund management has increased rather than decreased (partly due to the increased regulatory burden that you normally support), so fees need to reflect the costs, not the potential returns (which are to some extent outside the control of the fund manager).

crankedup said:

For small investors cash deposits are fairly worthless, many actually losing the customer money once inflation is taken into consideration and of course tax.

Pensions are (almost) tax free, so this is less of an issue here, but clearly at current rates, cash strategies offer a negative real return.

crankedup said:

Jeff Prestridge of the Mail on Sunday wrote an interesting article in the 22/5/16 edition.
Talking of managed funds he said the rewards for looking after our wealth are huge, it's a dog eat dog world. Few fund managers survive for long if they can't deliver the alpha. Successful ones don't remain successful for long becoming victims of their own prowess. Investment mediocrity follows compounded by the power of online fund supermarkets with their Best Buy and wealth lists directing investors into a sleet band of funds.

This has led to pressure on the investment fund industry to justify its current ways and charges is intensifying. M& G is the first in confirming that it will be cutting costs for investors who have bought it's funds directly through them, rather than a fund supermarket. These investors will need to sign up to M& G new online service and those investors will need to hold investments worth over 5k.

Hopefully it will spark a price war with online fund dealing services to cut their bloated fees. The winners will be investors, about time too.

Ok, so I think it is fair to ask:
1) to what extent should large investors subsidise small investors?
2) to what extent should long-term investors subsidise short-term investors
3) to what extent should the fund charging structure reflect the actual costs incurred, rather than something 'simple' that the customer can easily understand?

crankedup said:

So far as pension funds are concerned they are far to complex, even the Chief Economist Andy Haldane, of the Bank of England admitted that he cannot make the remotest sense of pensions. If he can't fathom them out what hope have ordinary working people. Government past and present along with the pensions industry are both guilty as sin, having some financial education within our schools. Jeff Prestridge.

We need to be careful to differentiate between the wrapper and the underlying investment proposition - the complexity of the former is driven by government regulation.

Why should large investors subsidise small investors, should the investment company be charging set rates for specific investment initial value / amounts. 5k -- 10k. 10.1k ---- 30k and so on for example.

2. Again I see no reason to subsidise small investors, I would much rather see the fees upfront.

3. As with any business, price structuring reflects the companies values, requirements, profit margins, costs. And of course the competition within a given Companies sector.

I agree, complexity of some investment is as a result of Government interventions and regulation. However, the reporting comments that I have posted indicate that the investment companies are also responsible, to what extent is unclear in fairness.

Investors are unlikely to have an interest in the investment company costs and overheads. Certainly my interests are only associated with how much money my managed fund is going to cost me.
Most importantly imo schools should be including basic economics in early schooling increasing that to more in depth economics for senior pupils.

[loafer123]

It is expensive to run a fund. Offices, risk officer, accounting, fund manager, analysts, reseach, support, legals, travel you name it.

The most reasonable charge is as a %age of NAV, and this is how most funds work.

If you think that is too high you can invest yourself directly.

I think there was some research that said a simple index tracker gets you most of the return anyway.

[sidicks]

crankedup said:

Why should large investors subsidise small investors, should the investment company be charging set rates for specific investment initial value / amounts. 5k -- 10k. 10.1k ---- 30k and so on for example.

That's interesting - clearly some aspects of costs (e.g. Admin) are fixed rather than variable (I.e. Dependent on fund size). Without cross subsidy. Then small policies would offer extremely poor value.

Would you prefer small investors not to be able to have a policy?

crankedup said:

2. Again I see no reason to subsidise small investors, I would much rather see the fees upfront.

Interesting - so would the product providers! Closer alignment of costs and expenses significant reduces the lapse risk for the provider and the cross subsidy betweem different investors.

Unfortunately this leads to the sort of 'complex' charging structure that we used to have (initial charges, bid offer spreads, policy fees, amcs), rather than an 'annual fund management charge only' approach.

This does seem at odds with your previous comments about simplicity...!

crankedup said:

3. As with any business, price structuring reflects the companies values, requirements, profit margins, costs. And of course the competition within a given Companies sector.

I agree, complexity of some investment is as a result of Government interventions and regulation. However, the reporting comments that I have posted indicate that the investment companies are also responsible, to what extent is unclear in fairness.

See above!

crankedup said:

Investors are unlikely to have an interest in the investment company costs and overheads. Certainly my interests are only associated with how much money my managed fund is going to cost me.

The costs of investing on behalf of the investor are surely relevant as to what a fair expense charge would be (and relevant to your issues with 'excessive' charging...?!

crankedup said:

Most importantly imo schools should be including basic economics in early schooling increasing that to more in depth economics for senior pupils.

I definitely agree - I'd say basic 'finance' rather than basic 'economics', but I think we're on the same wavelength.

[crankedup]

sidicks said:

crankedup said:

Why should large investors subsidise small investors, should the investment company be charging set rates for specific investment initial value / amounts. 5k -- 10k. 10.1k ---- 30k and so on for example.

That's interesting - clearly some aspects of costs (e.g. Admin) are fixed rather than variable (I.e. Dependent on fund size). Without cross subsidy. Then small policies would offer extremely poor value.

Would you prefer small investors not to be able to have a policy?

crankedup said:

2. Again I see no reason to subsidise small investors, I would much rather see the fees upfront.

Interesting - so would the product providers! Closer alignment of costs and expenses significant reduces the lapse risk for the provider and the cross subsidy betweem different investors.

Unfortunately this leads to the sort of 'complex' charging structure that we used to have (initial charges, bid offer spreads, policy fees, amcs), rather than an 'annual fund management charge only' approach.

This does seem at odds with your previous comments about simplicity...!

crankedup said:

3. As with any business, price structuring reflects the companies values, requirements, profit margins, costs. And of course the competition within a given Companies sector.

I agree, complexity of some investment is as a result of Government interventions and regulation. However, the reporting comments that I have posted indicate that the investment companies are also responsible, to what extent is unclear in fairness.

See above!

crankedup said:

Investors are unlikely to have an interest in the investment company costs and overheads. Certainly my interests are only associated with how much money my managed fund is going to cost me.

The costs of investing on behalf of the investor are surely relevant as to what a fair expense charge would be (and relevant to your issues with 'excessive' charging...?!

crankedup said:

Most importantly imo schools should be including basic economics in early schooling increasing that to more in depth economics for senior pupils.

I definitely agree - I'd say basic 'finance' rather than basic 'economics', but I think we're on the same wavelength.

For me if the cost of investing into a managed fund is not going to make financial sense then I wouldn't invest. If I know it's going to cost me x % each year on my investment that is easy to digest and decide upon. I don't want to know any other details other than my costs and of course investment potential. Based upon that theory I disagree with subsidies of high value investors to small investors. This could get as complicated, I would imagine, as using the 'investment value' based charging mechanism. For example use of the crossover points could become very messy.

No I wouldn't agree at all regarding company expenses and running costs having any bearing upon investor decision making. It comes down to the old tin of beans analogy, what is the ticket price? quality of product? convenience? would I buy another tin later? Has the product a good track record or is it popular?

I take your point regarding the bids and spreads, but for me this only applies as a investor buying upon my own behalf. I would expect all of the company admin costs and other costs already mentioned to be rolled up I to the investor charge as a % of personal investment. That makes it very easy for small investors to take a view.

Yes we certainly agree regarding education of school kids regarding finance /economy. For the life of me I do not understand why such a vital part of education is brushed aside at the young learning levels.

[crankedup]

loafer123 said:

It is expensive to run a fund. Offices, risk officer, accounting, fund manager, analysts, reseach, support, legals, travel you name it.

The most reasonable charge is as a %age of NAV, and this is how most funds work.

If you think that is too high you can invest yourself directly.

I think there was some research that said a simple index tracker gets you most of the return anyway.

Yes and that is the method of charging I prefer. Makes it easy to work out costs to investor. The question is are these charges fair and reasonable, I cannot possibly judge that and possibly they very much are fair and reasonable but equally maybe not. That is an area to be looked,especially in view of the Governments pensions reforms. It's all part of the openness and transparency agenda involving many businesses.

[sidicks]

crankedup said:

For me if the cost of investing into a managed fund is not going to make financial sense then I wouldn't invest. If I know it's going to cost me x % each year on my investment that is easy to digest and decide upon. I don't want to know any other details other than my costs and of course investment potential. Based upon that theory I disagree with subsidies of high value investors to small investors. This could get as complicated, I would imagine, as using the 'investment value' based charging mechanism. For example use of the crossover points could become very messy.

Basically, the implication of what you are saying is that, because of fixed charges, the low paid should not have access to savings / investment products, as without cross subsidy from large investors to small investors, fixed costs make these investments uneconomic for the investor (and product provider).

As an example, consider the current compulsory employer pension which (I think) will be increasing from 1% to 3% per annum. For a relatively low wage individual on say £18k p.a., that's currently an annual amount of £180, and hence that gives the product provider £1.80 to cover:
Advertising
Systems
Regulatory reporting
Administration (initial)
Fund management
Other costs.

How viable do you think that is?

crankedup said:

No I wouldn't agree at all regarding company expenses and running costs having any bearing upon investor decision making. It comes down to the old tin of beans analogy, what is the ticket price? quality of product? convenience? would I buy another tin later? Has the product a good track record or is it popular?

Unfortunately, the 'tin of beans' analogy doesn't really work with this type of product - with most goods you know exactly what you are buying and nothing changes in the future.

With a pension, neither the customer nor the provider knows whether they will be investing for 1 year, 5 years, 20 years etc. Will contributions increase, stay the same, reduce, cease over time etc.

How will investment returns vary in the future (and hence what income will the provider have to fund expenses?

crankedup said:

I take your point regarding the bids and spreads, but for me this only applies as a investor buying upon my own behalf. I would expect all of the company admin costs and other costs already mentioned to be rolled up I to the investor charge as a % of personal investment. That makes it very easy for small investors to take a view.

But costs as a % of investment do not align with the expenses incurred and, in future years, that will depend on whether the customer makes future contributions etc.

crankedup said:

Yes we certainly agree regarding education of school kids regarding finance /economy. For the life of me I do not understand why such a vital part of education is brushed aside at the young learning levels.

Agreed.

Edited by sidicks on Monday 23 May 23:04

[loafer123]

crankedup said:

loafer123 said:

It is expensive to run a fund. Offices, risk officer, accounting, fund manager, analysts, reseach, support, legals, travel you name it.

The most reasonable charge is as a %age of NAV, and this is how most funds work.

If you think that is too high you can invest yourself directly.

I think there was some research that said a simple index tracker gets you most of the return anyway.

Yes and that is the method of charging I prefer. Makes it easy to work out costs to investor. The question is are these charges fair and reasonable, I cannot possibly judge that and possibly they very much are fair and reasonable but equally maybe not. That is an area to be looked,especially in view of the Governments pensions reforms. It's all part of the openness and transparency agenda involving many businesses.

It is a very competitive market, so if someone could corner the market with a cheaper fee offering, it would have happened a long time ago.

I am good friends with a highly qualified and sensible wealth manager - you would like him - and he is well paid and has a nice lifestyle, but not rich.

[crankedup]

loafer123 said:

crankedup said:

loafer123 said:

It is expensive to run a fund. Offices, risk officer, accounting, fund manager, analysts, reseach, support, legals, travel you name it.

The most reasonable charge is as a %age of NAV, and this is how most funds work.

If you think that is too high you can invest yourself directly.

I think there was some research that said a simple index tracker gets you most of the return anyway.

Yes and that is the method of charging I prefer. Makes it easy to work out costs to investor. The question is are these charges fair and reasonable, I cannot possibly judge that and possibly they very much are fair and reasonable but equally maybe not. That is an area to be looked,especially in view of the Governments pensions reforms. It's all part of the openness and transparency agenda involving many businesses.

It is a very competitive market, so if someone could corner the market with a cheaper fee offering, it would have happened a long time ago.

I am good friends with a highly qualified and sensible wealth manager - you would like him - and he is well paid and has a nice lifestyle, but not rich.

Enjoyed the thread, albeit a short thread but nevertheless an interesting one from my perspective.
Going back in time I was just one customer/client who got burnt with the endowment mortgages during the 1980s Fortunately I switched only half of our mortgage into the dreaded low cost run by Scottish Life. We stuck with it to the bitter end and found that we just about broke even compared to the repayment half of the mortgage, lucky. ITHe selling of the low cost was overblown, at one stage I distinctly recall thinking 'this is money for nothing, somethings not right'. I don't bear a grudge and it's not the reason that I am a little more vocal in negatives terms when debating finance, but I suppose it lurks in the background. Fortunately twenty five years later customers and providers are all a little wiser.

[audi321]

I think it's important to remember that in many of the years of 'double digit returns' we had double digit inflation, or at least much higher than current.

If you return just 4% when inflation is at 0.2% then you're 3.8% up. If you return 10% when inflation is 8% then you're only 2% up. I'd take the 4% return over the 10% return scenario every day.

People always forget the impact of inflation.

Re Charges - Yes I would agree that these need to be carefully considered. However, any decent IFA should choose products which are cost effective and these should be regularly reviewed. Certain 'fixed fee' products (i.e. offshore bonds) can become extremely uneconomical if the value reduces substantially, due to a withdrawal for example.

MODS - This surely belongs in the Finance Section?

[crankedup]

sidicks said:

crankedup said:

Why should large investors subsidise small investors, should the investment company be charging set rates for specific investment initial value / amounts. 5k -- 10k. 10.1k ---- 30k and so on for example.

That's interesting - clearly some aspects of costs (e.g. Admin) are fixed rather than variable (I.e. Dependent on fund size). Without cross subsidy. Then small policies would offer extremely poor value.

Would you prefer small investors not to be able to have a policy?

crankedup said:

2. Again I see no reason to subsidise small investors, I would much rather see the fees upfront.

Interesting - so would the product providers! Closer alignment of costs and expenses significant reduces the lapse risk for the provider and the cross subsidy betweem different investors.

Unfortunately this leads to the sort of 'complex' charging structure that we used to have (initial charges, bid offer spreads, policy fees, amcs), rather than an 'annual fund management charge only' approach.

This does seem at odds with your previous comments about simplicity...!

crankedup said:

3. As with any business, price structuring reflects the companies values, requirements, profit margins, costs. And of course the competition within a given Companies sector.

I agree, complexity of some investment is as a result of Government interventions and regulation. However, the reporting comments that I have posted indicate that the investment companies are also responsible, to what extent is unclear in fairness.

See above!

crankedup said:

Investors are unlikely to have an interest in the investment company costs and overheads. Certainly my interests are only associated with how much money my managed fund is going to cost me.

The costs of investing on behalf of the investor are surely relevant as to what a fair expense charge would be (and relevant to your issues with 'excessive' charging...?!

crankedup said:

Most importantly imo schools should be including basic economics in early schooling increasing that to more in depth economics for senior pupils.

I definitely agree - I'd say basic 'finance' rather than basic 'economics', but I think we're on the same wavelength.

In truth I do wonder if people need protecting from themselves regarding investing, Government interventions must ensure that workers are protected and receive a fair and reasonable deal. As for those that invest directly through their own broker, well we know the risks and hopefully enjoy the rewards. But I accept your points and I can recognise that solutions that work for all are exceptionally difficult to introduce and or maintain.
Refreshing to have a two way civilised exchange.

[sidicks]

crankedup said:

In truth I do wonder if people need protecting from themselves regarding investing, Government interventions must ensure that workers are protected and receive a fair and reasonable deal. As for those that invest directly through their own broker, well we know the risks and hopefully enjoy the rewards. But I accept your points and I can recognise that solutions that work for all are exceptionally difficult to introduce and or maintain.
Refreshing to have a two way civilised exchange.

[Ginge R]

Murph7355 said:

1) Stop reading The Mail (I had to look up who Jeff Prestridge is. I thought it was some form of Tourette's you'd developed)
2) The quality of the people at the BoE hasn't been looking too great of late
3) Investments are like any other product you can buy. Research them the same way and take your own risk/reward balance
4) Stop reading The Mail

Jeff is, possibly, one of four of five financial journos who knows what he's talking about when he writes about financial planning. He's sat the exams too.

[Ginge R]

crankedup said:

I accept the statement from Andy Haldane to be of the highest integrity, honesty and value.
So far as personal investments go, I have taken to reading the Investors Chronicle again, after some years away from it.

Edited by crankedup on Monday 23 May 17:56

If a senior player at BoE doesn't understand pensions, he should go. Sure, they're complicated, and needlessly so, but his comments were stage for further fiddling and erosion of the very thing he complains about, clarity. A cynical move.

Still, on his income and his DB BoE pension scheme (uniquely invested in gilt) why should Haldane worry about the plebs?

[crankedup]

Ginge R said:

Murph7355 said:

1) Stop reading The Mail (I had to look up who Jeff Prestridge is. I thought it was some form of Tourette's you'd developed)
2) The quality of the people at the BoE hasn't been looking too great of late
3) Investments are like any other product you can buy. Research them the same way and take your own risk/reward balance
4) Stop reading The Mail

Jeff is, possibly, one of four of five financial journos who knows what he's talking about when he writes about financial planning. He's sat the exams too.

Have read his column for more years than I care to think about, always found them to be readable and of reasonable quality backed by credible research. Short and concise.

[Ginge R]

I work with many journos, and scribblies masquerading as journos, and I'm as cynical as the next man (in fact, more so than anyone I know) but Jeff is genuinely and unfailingly courteous and diligent.

[crankedup]

Ginge R said:

I work with many journos, and scribblies masquerading as journos, and I'm as cynical as the next man (in fact, more so than anyone I know) but Jeff is genuinely and unfailingly courteous and diligent.

Good to hear that some lights in the tunnel burn bright, long may he continue to do so. His piece alone is worth the cost of the newspaper imo.